Bitcoin, Crypto, Blockchain — Here’s What It All Means…

Yesterday, we discussed the Winklevoss twins and their new venture into the world of ‘stable coins’.

It’s a big step in clearing up the confusing grey area between cryptocurrencies and fiat money. They’ve created a digital coin and pegged it to the US dollar. This could help bridge the gap between crypto investors and the regulated financial sector.

And as I discovered Tuesday night at a blockchain workshop, understanding (and eliminating) the friction between the two spaces is one of the greatest obstacles holding the technology back.

But some are making great strides towards overcoming it.

In fact, there’s somewhat of a ‘space race’ happening as we speak. Techies around the world are feverishly working their way towards finding THE solution that could bridge the gap.

The Winklevoss twins are one contending team.

And here in New Zealand, there are several groups also in the running.

But before we get into revealing who these players are, I feel compelled to address a fundamental problem with the whole thing: jargon.

As a self-admitted economist, I know just how powerful jargon can be. It’s a great way to make your audience feel a bit dumb and to secure your job a little longer…but it’s not a good way to share ideas.

Take this snippet from a recent RBNZ bulletin for example:

Consistent with previous tests, results suggest that strong underlying profitability from repricing actions to maintain their net interest margins would allow these banks as a group to absorb significant losses through the stress scenario without breaching their minimum capital requirements.

In other words, banks are healthy.

Why do folks spit out gobbledygook when, as the great Kevin Malone said, ‘few word do trick’?

Your guess is as good as mine, but today I want to clear up some of the jargon-related confusion that surrounds blockchain.

 

Bitcoin — put simply

Let’s start with a term you’re probably already familiar with — bitcoin.

Bitcoin is like an actual gold coin. You can use it to buy stuff, if you want. Or you can hold on to it and see if the value goes up.

Lots of people, including me, hold on to bitcoin as a speculative investment. We’re waiting to see if the value goes up, just like gold.

But instead of keeping a bunch of gold coins in your pocket all the time, you’d want to store them somewhere. Maybe a vault. Or under your mattress. Or in a hole in the ground.

With bitcoin, the ‘vault’ is called a wallet. It’s a secret and secure spot for you to stash your coins.

Still with me?

So you’ve got your coins…and you’ve got your vault. Where do the coins come from?

Well, like actual gold, it comes from miners who are spending time and money trying to dig up a nugget. While actual gold miners work in mines with pickaxes, bitcoin miners work on computers with keyboards.

Eventually, a miner is rewarded for his hard-work and sweat with a chunk of gold…or in this case, a bitcoin.

Now here’s where the metaphor gets a bit wonky…so let me change gears for a second. [openx slug=inpost]

 

Accountants, ledgers and a golden prize

Imagine you’re an accountant. All day, you work on Excel spreadsheets, writing up transactions in the ledger, making sure everything adds up. It’s hellish work, but someone has to do it, right?

One day, your boss walks in and plops down a 50kg stack of receipts. He tells you to put them into a ledger. You groan because you’re going to have to work late and might miss Westside.

Your boss knows this, too. In a rare moment of compassion, he offers you a bonus if you get it all done — a gold coin. But he also knows it’s a lot of flimflam to dig through…and that you might make mistakes…and that his other accountants might be keen on winning that gold coin. So he opens it up to the whole accounting department.

The first one to type up all the transactions and get it to balance in the end wins the gold coin.

The race is on…

Now you and your fellow pocket-protector pals start working through the papers, typing like mad men. You’ve got a mean as gleam in your eye. You bare your teeth instinctually. Slight wisps of smoke start evaporating off your keyboard as you type with the speed of Greg Murphy.

Eventually, you reach the end of the pile, throw up your hand, proclaim your victory, perform a brief haka, and demand your prize.

Your boss — not one to be bamboozled — looks to your colleagues and asks for confirmation that your numbers were indeed correct. They nod, defeated.

The gold coin is yours.

Now, as ridiculous as it may sound, this is basically what bitcoin miners are doing as we speak.

They’re working their way through a 50kg pile of transactions, which in the bitcoin world is called a ‘block’. The transactions are real transactions made between other bitcoin owners.

Once a miner gets to the end of the pile — or the ‘block’ — he shoots his hand up. The other miners must agree that his math was sound. This is called ‘consensus’. If they don’t agree, they keep going until they get the right answer.

The miner takes his completed ledger to the ledger master folder and adds it after the last page. This folder is called the ‘blockchain’.

At any point, any of the accountants are free to look into the ledger folder and read through the transactions. It doesn’t sound fun to me, but apparently accountants love it.

Once the miner has added his file to the folder, he gets his prize — the coin.

The boss plunks down another pile of new transactions, and the whole shebang starts all over again.

Whew! That’s a lot of metaphor. Too much? You still with me?

So, you’ve got your gold coins (bitcoin) and your vault (wallet). You’ve got your accountants (miners) working through (mining) transactions in a ledger. Once they’re done, they agree on the answer (consensus). The ledger goes into the folder of all the ledgers (blockchain).

Got it?

Believe it or not, this barely scratches the surface of cryptocurrency and blockchain.

In my opinion, the real value and opportunity lies with the next layer — tokens.

I’ll explain those tomorrow…and reveal several actionable opportunities for Kiwis like you.

Stay tuned.

Best,
Taylor Kee
Editor, Money Morning New Zealand


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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