What you never knew you needed to know about Bitcoin and cryptocurrencies

Drive-thru:

  • Bitcoin and other cryptocurrencies are struggling for trust as viable investments and payment methods.
  • Cryptocurrencies claim they can conquer the challenges of internet commerce.
  • If you operate in locations with low electricity rates, you have “construction” opportunities in building for cryptocurrency miners.

If you’ve watched the erratic ups and downs of the cryptocurrency markets, you probably wonder what all the fuss is about. After all, a currency that loses 65% of its value in nine months isn’t very appealing from an investment perspective. It definitely won’t fare well for buying everyday items like coffee and peanut butter, either.

While you might think the whole concept is down and out, think again. The movement to add legitimacy and transparency to the cryptocurrency world is afoot. If that happens, cryptocurrency could become more stable, making it more suitable for investing and for everyday transactions. Here are aspects of crypto you probably didn’t know about but should.

The market is huge

Bitcoin is perhaps the most notable cryptocurrency, but there are plenty of other coins on the market. Ether, Litecoin, Ripple, MintChip, Dash, Monero and Peercoin are just a few other cryptocurrencies—as of this writing, there are other 1,950 cryptocurrencies alive, including 36 different Bitcoins. Bitcoin currently accounts for over half the crypto market. You probably also weren’t aware there is a cryptocurrency called BOPTI that was set up specifically for construction.

There is no physical coin. Instead, the coin is an analogy for a chain of digital signatures or a “blockchain.”

Internet commerce depends on trusted third parties, like banks and credit card companies, to process electronic payments. The idea behind Bitcoin and other cryptocurrencies is to rely on cryptographic proof instead of trust. That allows for transactions without middlemen, and—according to Bitcoin creator Satoshi Nakamoto (that’s his alias, anyway; so far the person’s real identity remains a mystery)—it overcomes the weaknesses inherent in a trust-based system. Those include the need for credentials, assessments of payment ability, costs for third-party involvement in transactions, and costs to cover payment uncertainties.

Forget about coins

There is no physical coin. Instead, the coin is an analogy for a chain of digital signatures or a “blockchain.” Cryptocurrencies get their value from people believing they have value as units of exchange and investments. In the crypto jargon, ‘mining’ is what validates the transactions of the blockchain. Here’s the simple explanation.

Crypto miners set up nodes on the cryptocurrency network and collect payment transactions in blocks of 2,000. They then use software to validate each payment in the block in order to confirm coin ownership and that the coin hasn’t been used more than once. Next, each miner on the network uses software that makes billions of guesses to unlock the numerical password for the block.

The first miner to find the solution gets to hold the permanent record for that block of transactions. A majority of other miners must confirm the winner. The block then gets added to other solved blocks and becomes part of the currency blockchain.

Mining relies on physical resources

The miner is rewarded with crypto coins and gets all the processing fees for that block of transactions. In the early days of Bitcoin’s existence, successful miners were getting 50 coins for solving a block. If you solved just one block in December 2012, the 50 coins you received were worth about $13 each. By April 2013, each coin was worth $266 each. As of this writing, a Bitcoin is worth over $6,000.

All the potential rewards and the fact that you could mine Bitcoins by making sure your computer was connected to the internet using the right software meant a lot of people got into the game. Some even went big time, setting up processing centers loaded to the gills with servers, cooling systems, and an enormous appetite for electricity.

Cryptocurrency is as much about electricity as it is about currency. In fact, Cryptocurrency can’t exist without electricity. That’s because validating blocks for each transaction requires computing power. Therefore, big time crypto miners carefully select the location for their mining activities based on electricity rates.

Contractors who understand technology are finding interesting projects in the cryptocurrency space as mining crypto is fast becoming a game only for those who can leverage lots of (real) money.

Places with hydroelectric like Washington State are attractive to crypto miners because of very low electricity rates—70% to 80% lower than the national average. In that market, you can conceivably produce 80 bitcoins a month for each megawatt of power. Massena, New York is another example of an area with hydroelectric that has lower electricity rates—about nine cents a kWh now.

The miner’s work gets progressively harder

There are built-in limitations to the Bitcoin scheme. The system gradually rewards fewer and fewer coins for solving blocks. Meanwhile, the blocks get progressively harder to solve as more nodes join the network and the network uses more computing power.

Contractors who understand technology are finding interesting projects in the cryptocurrency space as mining crypto is fast becoming a game only for those who can leverage lots of (real) money. Each location needs plenty of power, structures, access and tech equipment. For those places having low power rates, some people see an entirely new industry taking shape. Wenatchee, Washington contractor Malachi Salcido told Politico the plan is to build a platform there that the whole world would use.

Stumbling blocks abound

The best description for changes in cryptocurrency value is “a roller coaster.” Fortunes have been made and lost overnight. There have been the usual scams, bankruptcies, charges of manipulation, and false starts that come with anything unregulated and opaque. Banks keep flirting with the technology while trying to find a revenue stream.

Goldman Sachs set out to establish cryptocurrency trading desk but scrapped the plan early in September. Other banks are cautiously exploring schemes involving derivatives and digital currencies. Still, the U.S. Securities and Exchange Commission has yet to approve an exchange-traded fund for a cryptocurrency. ETFs trade like stocks and could add legitimacy and transparency to the cryptocurrency market.

When, or if, the cryptocurrency market enters a time of less volatility, you might expect people to use crypto for all types of construction payments. Meanwhile, there are reasons for contractors to have Bitcoin on their radars: the underlying cryptocurrency technology of blockchain is starting to show up for transaction processing and the administering of contracts in construction.

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