By Randy Jackson
Historical Context: The Price Revolution
After the Spanish conquest of the Americas in the sixteenth century, gold and silver from the mines of Mexico and Peru flooded Spain and spilled across Europe. As gold and silver were already the currencies of Europe, this dramatically increased the money supply, causing a sustained period of inflation throughout Europe. The economic historian Earl Hamilton named this period “The Price Revolution,” highlighting the ripple effects on prices and economic power structures due to this dramatic shift in currency supply.
From Tangible Value to Fiat: The Evolution of Money
For centuries, the value of money was rooted in tangible commodities like gold and silver. In fact, for much of human history, currency was the value of the actual coin exchanged, often gold, silver, copper, or bronze. Later, and for centuries longer, the value of paper currencies depended on a country’s gold reserves. However, gold-reserve-based currencies limited the ability of governments to control the economy, such as the ability to increase money supply during economic downturns. By the 1970s, governments adopted “fiat” currency – fiat literally means “let it be done,” i.e., a decree, in this case allowing government economic actions and policies, rather than physical gold, establish the value of a country’s currency.
The Rise of Cryptocurrency
Today, cryptocurrency represents a radical shift in understanding, using, and valuing currency. It is a currency that does not depend on minerals or government authority. Instead, its value depends on the trust in the underlying technology, called “blockchain,” and the community consensus of its users; in other words, the value of a cryptocurrency at any moment is the market “sentiment” for that cryptocurrency. Today, hundreds of billions of dollars (US) worth of cryptocurrencies are traded daily. There are many different cryptocurrencies; Bitcoin, Ethereum, and Tether make up the majority of daily trading volumes.
Advantages and Challenges of Decentralization
Cryptocurrency proponents tout decentralization from government and banking institutions as one of its main advantages. Without currency exchange or bank intermediaries, cryptocurrencies can facilitate easier, faster, and cheaper international transactions, making global commerce more accessible. They also present the paradox of user anonymity paired with transparency of transactions. Using blockchain technology, all cryptocurrency transactions are traceable and on a public ledger, but the person or entity behind the transaction is anonymous.
Practical Guide: How to Purchase Cryptocurrency
● Create an account on a cryptocurrency exchange: Start by investigating the most widely used cryptocurrency exchanges; the top three are Coinbase, Binance, and Kraken. To comply with financial regulations, you must register and verify your identity. This typically involves providing your name, address, and a copy of a government-issued ID.
● Deposit Funds: Once you have an account, you can transfer funds from your bank account or use a credit card. Your cryptocurrency exchange account will hold the funds you have transferred. You then have funds available to purchase the cryptocurrency of your choice.
● Make a purchase of cryptocurrency: Once you’ve decided on which cryptocurrency to purchase, you can place an order to buy it, or a fraction of it, depending on its price and the minimum purchase amount on the exchange. Transaction fees will apply. To this point, this process is similar to executing trades on a stock exchange.
● Secure your cryptocurrency with a Wallet: There are two types of cryptocurrency Wallets. Hot Wallets are connected to the Internet, allowing easy access to transactions. Cold Wallets are held separately and are not connected to the internet, often on a USB. This digital wallet does not hold the cryptocurrency but the information that proves ownership and the digital keys (information) needed to enable your interaction with the blockchain holding the cryptocurrency.
Understanding Cryptocurrency Transactions
A cryptocurrency transaction relies on that blockchain technology, which offers a highly secure, transparent, and tamper-proof method of recording transactions across a global network of decentralized computers. The steps detailed above explain how to purchase cryptocurrency. The following (VERY simplified version) describes what happens behind the scenes when blockchain technology performs the purchase transaction.
● Transaction creation: When you place an order to buy (or sell) a cryptocurrency, you are requesting to transfer ownership of a certain amount of cryptocurrency. This transaction includes the sender’s details, the recipient’s wallet address, and the amount to be sent.
● Miner Verification: Your new transaction is pooled with other as-yet unconfirmed transactions to form a block of transactions selected by “miners” for processing. A miner registers the transaction on the blockchain using specialized hardware – ASICs, or Application-Specific Integrated Circuits – designed to mine one and only one type of cryptocurrency. The miner uses the ASIC to solve a unique cryptographic puzzle created by a mathematical algorithm based, in part, on the unique transactions included in the block.
Because miners are rewarded for solving the puzzle with a certain amount of the underlying cryptocurrency, they compete to find a solution. When a miner solves the puzzle, the block of transactions is added to the blockchain as a permanent, unalterable verification of those transactions. The transfer of ownership from seller to buyer is now complete.
Cryptocurrency Mining and Environmental Impact
This description of cryptocurrency mining is extremely basic – the nuances and complexities of the actual mining would just boggle the mind of any cryptocurrency novice. However, you can think of the extensive data-processing centers necessary to run blockchain processes as a type of physical cryptocurrency mines.
Blockchain processes require large amounts of electricity for the computers to solve complex mathematical puzzles needed for blockchain functionality. Additional electricity is also necessary to keep the computers cool. As a result, these cryptocurrency mines are built in areas with low electricity rates and places where less air conditioning is required. However, just as most types of physical mining have a negative impact on the environment, the impact of such digital mining operations on the environment is also a concern.
Conclusion: The Future of Mining and Technology
Today, there are cryptocurrency “mines,” or data processing centers, across Mexico, even as Mexico continues the centuries-old tradition of mining metals from the earth – it’s the world’s top producer of silver, and mines significant quantities of gold, copper, and zinc (see articles on mining elsewhere in this issue). Creating wealth by extracting physical minerals seems fundamentally “normal” when it comes to mining, whereas the wealth created by solving advanced equations of cryptographic puzzles doesn’t line up with our concept of mining at all.
And yet, technology is rapidly changing everything, including our concepts. New technologies like blockchain are innovative and capable of transforming entire industries beyond finance; they have already transformed healthcare, real estate, and how supply chains operate. The nature of blockchain technology ensures that once information is entered, it cannot be altered. This offers a technological platform for benefits far beyond the realm of currency exchange.
For contact and comment, email: box95Jackson@gmail.com.
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