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Cryptocurrency Basics

Bitcoin’s Dual Personality 2.1

Editor’s Note
The following transcript was taken from one of Kelly’s live classes for tax professionals.

SLIDE 28

We have four chapters in this section:

  1. bitcoin’s dual personality
  2. brief history of cryptography
  3. what is bitcoin (Kelly’s definition)
  4. bitcoin blockchain software

This is going to get a little technical. Remember we started slow and we’re building to a crescendo.

SLIDE 29

A brief review:

Remember the 2008 financial crisis really opened a lot of people’s eyes to decades of problems within the existing financial system. In the 70s we had stagflation and the end of the gold standard and the birth of fiat money. In the 80s we had a recession and the savings-and-loan crisis. In the 90s we had more recession, high unemployment, and bailouts. All of this resulted in broken trust in the modern monetary system.

SLIDE 30

The financial crisis also opened up a lot of people’s eyes who were developers. The 2008 financial collapse was the galvanizing event that culminated in Satoshi Nakamoto’s announcement of his invention, Bitcoin. We’ll find out more about what that means a little later.

SLIDE 31

Let’s do a brief introduction to bitcoin’s dual personality.

Bitcoin with a little “b” is a cryptographic currency. We call it a cryptocurrency. It’s a digital representation of currency that is not legal tender, which we talked about quite a bit in part one.

Bitcoin with a big “B” is a collection of distributed ledgers known as the Blockchain. Bitcoin is the software that generates the cryptocurrency. All blockchains, I’ll repeat all blockchains, if they are true blockchains, are a piece of software that generates a cryptocurrency, because it’s in the generation of that cryptocurrency that they solve the double spend problem. I’ll only talk about the surface of this topic, because if I were to get into the details, you’d be falling asleep.

Cryptocurrencies are born from a blockchain and all blockchains have a cryptocurrency, because that’s what makes them work and be secure. So, what’s confusing about bitcoin is that they used the same name for the cryptocurrency (bitcoin) as they used for the software (Bitcoin). Bitcoin and bitcoin. It used to be this nomenclature was used extensively, bitcoin with a little “b” is the cryptocurrency, Bitcoin with a big “B” is the software, but it’s not as prevalent anymore it seems.

Ether is another cryptocurrency and Ethereum is the blockchain. You’ll hear a lot of people call the cryptocurrency Ethereum, but it’s incorrect, the actual currency is called Ether.

Bitcoin software creates a ledger of time stamped bitcoin transactions called blocks. Blocks are connected with a secure encrypted link using cryptography.

slide 31 again

So, you can see in this slide that there are three blocks. They each have a bunch of transactions in them. They are connected via that chain, and that chain is where there is some cryptography magic that happens. These blocks of transactions are linked together from the very beginning of the first block to the very end of the last block, whenever that is.

Audience: Have you bought any cryptocurrencies?
Speaker: I did a bunch of transactions in 2015. I bought a couple of bitcoin, I sold one, then bought another.

Audience: What did I buy and sell that whole time?
Speaker: I only bought and sold bitcoins.

Bitcoin lives in its own blockchain. There’s only one blockchain for Bitcoin. Now I can complicate that definition a lot more by talking about forks, but I’m not going to go there yet.

I repeat, there is a single blockchain where all bitcoins live. I’ll get to more of those technology questions coming up shortly. What I was introducing you to in this slide is the idea of cryptography. Cryptography is what makes blockchains and bitcoin work along with a few other technologies.