This post originally appeared on the Louisiana Technology Park blog.
A recent surge in bitcoin prices has created unprecedented interest in cryptocurrencies as investors look to cash in on the soaring value of the volatile virtual coins. Unfortunately, that bump in interest has not been accompanied by a corresponding increase in knowledge, according to Charlie Davis, a serial entrepreneur and cryptocurrency expert from Baton Rouge.
“Very few people know a lot about bitcoin — and worse than not knowing a lot is knowing something that’s not accurate,” Davis said at a recent Tech Park Academy event at the Louisiana Technology Park.
Davis, who is founder and president of Moxey, a digital currency designed for everyday real-world transactions, is working to demystify the issue through a series of talks on the volatile past, present and future of cryptocurrencies. Here are some highlights of his recent discussion at the Tech Park.
What is Bitcoin?
Everyone knows how to use money, Davis argues, but very few people know actually know how money works — for example, the specifics of how the U.S. Federal Reserve creates money. “Money is a simple thing to use and a very hard thing to understand,” Davis says. He contends that bitcoin currently occupies a similar mental space for most people.
Bitcoin’s anonymous inventor, who went by the pseudonym Satoshi Nakamoto, created a novel method for a decentralized network to agree upon a shared transaction ledger. A central authority, such as a bank, is replaced by the concept of a “blockchain” — an ever-growing ledger that records the transaction history of all bitcoins in circulation, and that lives on computers around the world that make up the bitcoin network.
“It used math and very sophisticated cryptography to prove that the blockchain has not been altered, so it gives us confidence,” Davis says.
Underpinning the entire network is the concept of “mining” — the process by which blocks of transactions are verified and added to the blockchain. Bitcoin miners use special software to solve math problems and are issued a certain number of bitcoins in exchange, which creates an incentive to create more of the digital currency. As more miners join the network, the math problems become more difficult and require more time, computing power and energy to solve.
Bitcoin uses peer-to-peer technology to operate with no central authority or banks, so transaction management and the issuance of new bitcoins are carried out collectively by the network. Supporters say this is one of the key advantages of the digital currency, because bitcoins can be transferred directly from person to person through the internet without going through a bank or clearinghouse. This means users can spend bitcoins in any country, their accounts cannot be frozen and fees are much lower than for most bank transactions.
“It’s a powerful tool that people are still figuring out how they want to use,” Davis says. “It’s such a basic idea that it creates an infinite number of ways you can do it, which adds to the confusion.”