How a Cryptocurrency Works

Bitcoin is money, digital cash, a way of buying and selling things over the Internet. The Bitcoin value chain is composed of several different constituencies: software developers, miners, exchanges, merchant processing services, web wallet companies, and users/consumers. From an individual user’s perspective, the important elements in transacting coin (I’ll use “coin” in the generic sense here) are an address, a private key, and wallet software. The address is where others can send Bitcoin to you, and the private key is the cryptographic secret by which you can send Bitcoin to others. Wallet software is the software you run on your own computer to manage your Bitcoin. There is no centralized “account” you need to register with another company; if you have the private key to an address, you can use that private key to access the coin associated with that address from any Internet-connected computer (including, of course, smartphones). Wallet software can also keep a copy of the blockchain—the record of all the transactions that have occurred in that currency—as part of the decentralized scheme by which coin transactions are verified. 

eWallet Services and Personal Cryptosecurity
As responsible consumers, we are not used to many of the new aspects of blockchain technology and personal cryptosecurity; for example, having to back up our money. Decentralized autonomy in the form of private keys stored securely in your ewallet means that there is no customer service number to call for password recovery or private key backup. If your private key is gone, your Bitcoin is gone. This could be an indication that blockchain technology is not yet mature enough for mainstream adoption; it’s the kind of problem that consumer-facing Bitcoin startups such as Circle Internet Financial and Xapo are trying to solve. 

There is opportunity for some sort of standardized app or service for ewallet backup (for example, for lost, stolen, bricked, or upgraded smartphones or laptop/tablet-based wallets), with which users can confirm exactly what is happening with their private keys in the backup service, whether they self-administer it or rely on external vendors. 

Personal cryptosecurity is a significant new area for consumer literacy, because the stakes are quite high to ensure that personal financial assets and transactions are protected in this new online venue of digital cash. Another element of personal cryptosecurity that many experts recommend is coin mixing , pooling your coins with other transactions so that they are more anonymous, using services like Dark Coin, Dark Wallet, and BitMixer. As the marketplace of alternative currencies grows, demand for a unified ewallet will likely rise, because installing a new and separate wallet is required for most blockchain-related services, and it is easy to have 20 different ewallets crowding your smartphone.
Despite their current clunkiness in implementation, cryptocurrencies offer many great benefits in personal cryptosecurity. One of the great advantages is that blockchain is a push technology  (the user initiates and pushes relevant information to the network for this transaction only), not a pull technology  (like a credit card or bank for which the user’s personal information is on file to be pulled any time it is authorized). Credit card technology was not developed to be secure on the Internet the way that blockchain models are developing now. Pull technology requires having datastores of customer personal information that are essentially centralized honey pots, increasingly vulnerable to hacker identity theft attacks (Target, Chase, and Dairy Queen are just a few recent examples of large-scale identity-theft vendor database raids). Paying with Bitcoin at any of the 30,000 vendors that accept it as of October 2014 (e.g., Overstock, New Egg, and Dell Computer; see ) means not having to entrust your personal financial information to centralized vendor databases. It might also possibly entail a lower transaction fee (Bitcoin transaction fees are much lower than merchant credit card processing fees).
Relation to Fiat Currency 
Considering Bitcoin as the paradigm and most widely adopted case, the price of Bitcoin is $399.40 as of November 12, 2014. The price has ranged considerably (as you can see in Figure 1-2 ), from $12 at the beginning of 2013 to a high of $1,242 per coin on November 29, 2013 (trading higher than gold—$1,240 per ounce—that day).  That peak was the culmination of a few factors: the Cyprus banking crisis (March 2013) drove a great deal of demand, for example. The price was also driven up by heavy trading in China until December 5, 2013, when the Chinese government banned institutions (but not individuals) from handling Bitcoin, after which the price fell. In 2014, the price has declined gradually from $800 to its present value of approximately $350 in December 2014. An oft-reported though disputed metric is that 70 percent of Bitcoin trades are made up of Chinese Yuan.  It is difficult to evaluate how much of that figure indicates meaningful economic activity because the Chinese exchanges do not charge trade fees, and therefore people can trade any amount of currency back and forth for free, creating fake volume. Further, much of the Yuan-denominated trade must be speculation (as is true for overall Bitcoin trade), as there are few physical-world vendors accepting Bitcoin and few consumers using the currency for the widespread consumption of goods and services.


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