The value of a Bitcoin rose to $19,000 last month, and then dropped $4,000 the same day. Those of us who had always dismissed the currency as nonsense—as simply a tool for facilitating black market trading—suddenly thought to ourselves: Maybe I should have bought a bitcoin! Or maybe not. What exactly is a Bitcoin again?
It isn’t likely that employers are going to start paying you in Bitcoins anytime soon, or that candidates for new roles will be demanding Bitcoins in their benefits packages, but the fact is, cryptocurrencies are here to stay, and will only become more prevalent. Here we explain the basics so you can at least speak somewhat intelligently about the dark underworld of cryptocurrency at your dinner party this weekend, if not go buy a Bitcoin yourself.
How Cryptocurrencies Work
Bitcoin is the preeminent cryptocurrency and first to be used widely. However hundreds of cryptocurrencies exist, and more come into being every month. Cryptocurrencies use cryptographic protocols, or extremely complex code systems that encrypt sensitive data transfers, to secure their units of exchange. Cryptocurrency developers build these protocols on advanced mathematics and computer engineering principles that render them virtually impossible to break, and thus to duplicate or counterfeit the protected currencies. These protocols also mask the identities of cryptocurrency users, making transactions and fund flows difficult to attribute to specific individuals or groups. This is why Bitcoin has been so popular with black market exchanges.
Cryptocurrencies are also marked by decentralized control. Cryptocurrencies’ supply and value are controlled by the activities of their users and highly complex protocols built into their governing codes, not the conscious decisions of central banks or other regulatory authorities. In particular, the activities of miners – cryptocurrency users who leverage vast amounts of computing power to record transactions, receiving newly created cryptocurrency units and transaction fees paid by other users in return – are critical to currencies’ stability and smooth function.
Importantly, cryptocurrencies can be exchanged for fiat currencies in special online markets, meaning each has a variable exchange rate with major world currencies (such as the U.S. dollar, British pound, European euro, and Japanese yen). Cryptocurrency exchanges are somewhat vulnerable to hacking and represent the most common venue for digital currency theft however.
A cryptocurrency’s block chain is the master ledger that records and stores all prior transactions and activity, validating ownership of all units of the currency at any given point in time. As the record of a cryptocurrency’s entire transaction history to date, a block chain has a finite length – containing a finite number of transactions – that increases over time.
Identical copies of the block chain are stored in every node of the cryptocurrency’s software network – the network of decentralized server farms, run by computer-savvy individuals or groups of individuals known as miners, that continually record and authenticate cryptocurrency transactions.
Every cryptocurrency holder has a private key that authenticates their identity and allows them to exchange units. Users can make up their own private keys, which are formatted as whole numbers between 1 and 78 digits long, or use a random number generator to create one. Once they have a key, they can obtain and spend cryptocurrency. Without the key, the holder can’t spend or convert their cryptocurrency – rendering their holdings worthless unless and until the key is recovered.
Cryptocurrency users have “wallets” with unique information that confirms them as the temporary owners of their units. Whereas private keys confirm the authenticity of a cryptocurrency transaction, wallets lessen the risk of theft for units that aren’t being used. Wallets used by cryptocurrency exchanges are somewhat vulnerable to hacking – for instance, Japan-based Bitcoin exchange Mt. Gox shut down and declared bankruptcy after hackers systematically relieved it of more than $450 million in Bitcoin exchanged over its servers.
Wallets can be stored on the cloud, an internal hard drive, or an external storage device. Regardless of how a wallet is stored, at least one backup is strongly recommended. Note that backing up a wallet doesn’t duplicate the actual cryptocurrency units, merely the record of their existence and current ownership.
Miners serve as record-keepers for cryptocurrency communities, and indirect arbiters of the currencies’ value. Using vast amounts of computing power, often manifested in private server farms owned by mining collectives comprised of dozens of individuals, miners use highly technical methods to verify the completeness, accuracy, and security of currencies’ block chains. The scope of the operation is not unlike the search for new prime numbers, which also requires tremendous amounts of computing power.
The term “miners” relates to the fact that miners’ work literally creates wealth in the form of brand-new cryptocurrency units. In fact, every newly created block chain copy comes with a two-part monetary reward: a fixed number of newly minted (“mined”) cryptocurrency units, and a variable number of existing units collected from optional transaction fees (typically less than 1% of the transaction value) paid by buyers. Thus, cryptocurrency mining is a potentially lucrative job for those with the resources to invest in power- and hardware-intensive mining operations.
If you fancy a new job as a Bitcoin miner, you don’t need to interview. All you need to do is follow these 8 steps. We would suggest pursuing some other technology jobs however—ones with a steady pay check and colleagues that you can actually see and name. For those interested in positions in ERP, CRM, CMS / ECM and BI, we may have just the thing you are looking for. Email firstname.lastname@example.org or give us a call today.