Crypto Currency

Chapter 12
Part 1
The beginnings of money and
the importance of trust
 Before we dive into the world of cryptocurrencies,
let us take a step back and learn some basics about
the concept of money.

• Money is everything that can be used as a medium of

exchange
• Money had many different forms throughout human history
• Before the invention of money, people used barter systems
(though newer research suggests that money developed
after the invention of debt)
• Bitcoin is the biggest financial innovation since the
introduction of credit cards in the 1950s and the dawn of
online banking in the late 1990s.
What is money?
• People have been exchanging things with each other
since the dawn of humankind. First there were barter
systems. People exchanged items that they attributed
equal intrinsic value to, as in “I give you this animal hide
and you give me that sharp stone you found.” This
system works quite well for exchanges between two
people, but is usually too complex as soon as more
people, more goods and longer distances are involved.
• Also, a barter system may also reach its limits when only
two people are involved in the exchange. Let’s say you
have a large amount of berries and want to exchange
them for an animal hide. If both parties want and need
the item offered by the other, there is a deal. But if there
is no coincidence of wants, you have a problem
Why do we need money?
• Furthermore, the problem with an exchange system like barter is that
it’s not very efficient. To fix this predicament, human history has seen
lots of manifestations of the idea of exchanging one commodity for
another: animal hides, salt, sea shells, gemstones, grain and precious
metals, among other different commodities, have all been used to
exchange one valuable item for another.
• On the other hand, what happens if the other party already has enough
berries or doesn’t need an animal hide? To tackle this problem, people
invented money.
• At this point, we are not talking about coins or paper money as we know
it, but anything that is considered a store of value which all parties
involved in the exchange agree on can be exchanged for another item
thought to be valuable.
• Money is a useful tool that can be used to exchange
value between people. Broken down to its core, it’s
best described as a “medium of exchange.”
• Money is an item or entity that can be verified and is widely accepted as payment.
 Some characteristics of money
• Medium of Exchange
Money is a medium of exchange for commercial transactions
involving goods, services and labor. It is very useful to have a
designated medium of exchange for transactions that is
commonly accepted.
• Store of Value
For later use, money can be used as a store of value for use
in transactions until it is needed. A prerequisite for this is
trust that money retains its value.
• Durability
Money is immutable and durable. Thanks to its sturdiness, it
can be used until new supply is printed to replace the old
supply.
• Portability
Money can be easily moved around and exchanged with other currencies. For
instance, the people on the island of Yap in Micronesia used limestones as
official currency before they started using US Dollars. One of these stones
would often weigh more than a car, making moving them very challenging. For
this reason, they were usually stored in one place even if they changed
ownership and people had to remember who was the actual present owner.
• Divisibility
Money is divisible - it is available in smaller increments for the exchange of
things of varying values. Imagine if you wanted to buy a pack of gum but you
could only use a 50 note - it would definitely complicate the transaction.
• Verifiability
Counterfeit money is probably as old as money. In order to accept and trust
money, it has to be impossible to forge and easily identified as being
legitimate. Counterfeit money leads to the reduction of buying power of real
money.
• Fungibility
Individual units of money have to be essentially interchangeable, meaning that
that two equal units have to be equivalent and indistinguishable. This also
relates to divisibility. Stores of value that don’t meet these criteria are termed
“non-fungible.” The most popular example of something that can be traded like
money that’s non-fungible is a collectible, like a piece of art.
Why is something considered
valuable?
• Sea shells, gemstones or even gold, basically have no
intrinsic value apart from being pretty and shiny, or in
the case of gold, being able to conduct electricity well.
Yet over the course of thousands of years, people used
such items as a means of exchange. They were valuable
because people put trust into them.

• Intrinsic value in this context is the perceived value that

is attributed to something. This value is perceived from
its intrinsic, attributed value.
• Even today, this holds true for our most popular and
most widely used currencies, such as the Euro and the
US Dollar. They are both printed by central banks and
get their value from being backed by governments that
people trust.
All in all, most currencies and money derive their
value from the fact that people think they are
valuable. People who use them trust in their value.

• Trust in money and other types of assets is established in

various ways.
• Gold and silver are trusted because throughout history, they
have been perceived as valuable and been used to produce
items of value thanks to their decorative properties.
• Fiat currencies - issued by government decree - are trusted
thanks to their history of being perceived as valuable,
because they are backed by governments and issued by
central banks.
• If people were to lose their trust in even one of the factors
that establish this trust, value is bound to decrease. For
instance, hyperinflation (massive inflation) among a few
other things, is usually triggered by citizens of a nation
losing their confidence in a currency.
 What's the difference between a
cryptocurrency like Bitcoin and fiat
money?
Cryptocurrencies share many similarities with
conventional fiat money, but also offer some
interesting advantages.
• Both can be used for payments and as a store of value
• Both rely on widespread consumer trust in order to
function as a means of exchange
• Fiat money is issued and controlled by (central) banks
and governments
• Bitcoin is produced and distributed through a process
called mining and is not controlled by a centralised
authority
• Bitcoin can be trusted because it is tamper-proof and
cannot be spent twice
• A Bitcoin transaction cannot be reversed, cancelled or
charged back.
Cryptocurrencies and conventional currencies have two
essential features: they enable frictionless payments
between two parties and act as a store of value
• While trust vested in fiat currencies is ensured through
the money supply issued by a central authority, the
trust vested in cryptocurrencies is founded on the
underlying technology - blockchain technology.
• When you buy something with fiat currency, you need
to rely on a trustworthy authority such as the European
Central Bank (ECB) or governmental institution to serve
as an intermediary that vouches for the currency’s
worth.
• Either way, buyer and seller trust that the currency will
still sustain its value after a transaction.
Fiat Vs Crypto

• What is fiat money?

Commodity money gets its value from its own worth, like with precious metals
(e.g. gold and silver), salt, or even shells. Fiat money has attributed value
because a government declares it legal tender - it has no intrinsic value.
• What are cryptocurrencies?
Cryptocurrencies are digital assets that are a medium of exchange between two
parties. They allow direct transactions between individuals without the
intervention of an intermediary, such as a bank. While fiat money is subject to
inflation and central banks can print more at any time, the leading
cryptocurrency Bitcoin has a fixed supply of 21.000.000 units, making it even
scarcer than gold.
Are cryptocurrencies and fiat money
the same?
• Yes and no.
• Cryptocurrencies are money insofar as they allow
exchanges between two parties and act as a store of
value. However, they also offer features which the
traditional money system is unable to offer right now:
cryptocurrencies can be spent and received by anyone,
anywhere, at any time throughout the world and
without the need for a bank or a government. This is
the most revolutionary aspect of cryptocurrencies.
• Furthermore, fiat money basically equates to debt.
When a central bank issues banknotes, it is
simultaneously issuing you, the consumer, a percentage
of your government’s debt. How is this the case, you
might logically ask? Think about how, for example, the
EU and the United States create money.
• Most of the money a government creates is when loans are
taken out. Banks create money when people borrow money.
Take the case of the US dollar: if no loans were taken out,
there likely wouldn’t be any dollars in circulation either. In
other words, without consumers taking out debt to banks,
the US dollar wouldn’t be out there in the world.
• While fiat money seems to get a major part of its value from
debt, this is not the case with Bitcoin. Bitcoin has intrinsic
value beyond the trust of its community. Bitcoin doesn’t
lean on a system of debts, its value boils down to how
effective it is as a medium of exchange.
• Bitcoin has created a new form of trust for our future global
monetary system. The system behind Bitcoin is completely
transparent and based on maths and the
actual consensus of the everyday user. Keeping all this in
mind, which is a better option for our future? Bitcoin or fiat?
• Fiat money has attributed value because a government
declares it legal tender - it has no intrinsic value.
• Cryptocurrencies can be spent and received by anyone,
anywhere, and at any time without the need for a bank or a
government. This is what makes them so revolutionary.
Blockchain
How does a blockchain work?
• The internet promised an age of decentralised
freedom, but today we still heavily rely on centralised
players like we did in the analogue age. Many of the
processes that run our global financial system and the
world at large, are still paper-based and at risk of
human error from centralised authorities. Blockchain
technology is here to change that.
• A blockchain is a decentralised, tamper-proof database
• A blockchain is an ingenious system for ensuring mutual
trust and collective consensus
• A cryptocurrency like Bitcoin is just one of a
blockchain’s many applications
• Contracts, digital identities, logistics, just about every
kind of asset and so much more can also benefit from
utilising a blockchain
What is a blockchain
• A blockchain is a special type of database. Transactions are
not governed by a single party, but rather the entire
transaction history is recorded in a decentralised,
distributed ledger.
• Blockchain technology is safe and robust and thus ideal for storing and
processing sensitive information. The revolutionary aspect behind
blockchain is that processes are not completed by one, but by many
computers, simultaneously.
• Bitcoin is a typical application. Trust in Bitcoin is secured through a
decentralised, immutable ledger that is not run by a single company or
government but by an independent community of computers all around
the world.
• All computers are in the same network, called a peer-to-peer network.
Inside the industry, this model is often called a “distributed trust
model”.
A model of trust
• Blockchains offer groundbreaking technology with the potential to change the
internet and even the world for many reasons. As we dive deeper into how
blockchains work, you will find it increasingly easy to understand exactly why.
• Each node contains a complete image of a blockchain’s network.
• Who can be trusted in a digital space, where everything can easily be copied and
most users are anonymous? Blockchain can help to solve this pressing question.
• A blockchain is not updated and validated by a single individual, but by
hundreds, thousands, or even millions of community members in regular
timeframes.
• Instead of one central party such as a company, government or bank, the entire
blockchain network agrees on a shared “reality”, i.e. complete history of every
transaction that has ever taken place within the network. This agreement is
called consensus.
• Because every single transaction that has ever taken place within the network
is recorded and permanently stored, it is not possible to change the ledger’s
history or send the same transaction twice (i.e. double spend).
• This certainty creates mutual trust.
• In other words, participants of a blockchain network don’t even have to trust
each other because no single user can cheat the system as a whole.
• Blockchain technology is suitable for transactions between parties that need to
be verifiable and permanent, such as contracts, ownership of intellectual
property, identification, and, of course, cryptocurrencies like Bitcoin.
 How do blockchains work?
• To ensure that the network’s transaction history is
not manipulated by anyone, the community behind
the network has to agree on a common “reality”.
• In a blockchain, transactions are stored in blocks, with each newly
generated block referring to the block before it with a unique identifying
number called a “hash.” These blocks constitute a chain, hence the name
“blockchain”. This chain continues on indefinitely.
• In the case of blockchains such as Bitcoin, trust is based on technological
features such as the fact that all blocks can be viewed by the public. No
transaction is added to a block without first being verified by a miner - a
special type of computer in the network. This way the community
ensures that no fraudulent transaction is recorded in a blockchain.
• Consequently, a blockchain can even be used by parties who don’t
necessarily trust each other to do business because they know their
transactions are tamper-proof.
What is double-spending and why is
it such a problem?
• Double-spending is a major computing problem that has to
be solved by every cryptocurrency. If not, the
cryptocurrency in question is essentially worthless because
anyone can duplicate a transaction with the currency at
any time.
• “Double-spending” means that the same units of a currency
could be spent twice
• Double-spending would destroy the trust in a
cryptocurrency
• Cryptocurrencies prevent double-spending by using a
blockchain that combines an open ledger with cryptographic
algorithms
Double-spending
• Double-spending means that the same units of a
cryptocurrency could potentially be spent twice, thus it is
crucial to technologically eliminate this possibility.
• Double-spending means that the same units of a
cryptocurrency could potentially be spent twice, thus it is
crucial to technologically eliminate this possibility.
Double-spending
• Double-spending would basically destroy the technological
grounding on which a blockchain is founded - a database that is
not only tamper-proof, but also records every transaction that has
ever taken place within the network. Thus, the potential to
execute double-spending would fundamentally undermine the
trust in a cryptocurrency like Bitcoin or any other blockchain
database.
• A related analogy for explaining this conundrum is the “Byzantine
Generals Problem”, which addresses the challenge multiple
parties that do not trust each other face when they undertake a
joint venture in which they need to cooperate to succeed.
• The Byzantine Generals Problem is a thought experiment to
illustrate the issue of disagreement between players in a
decentralised system. In this comparison, only a coordinated
attack by all generals each controlling his own army leads to
victory. As soon as one general defects or attacks another general,
the battle is lost.
Double-spending
• Double-spending would basically destroy the technological
grounding on which a blockchain is founded - a database that is
not only tamper-proof, but also records every transaction that has
ever taken place within the network. Thus, the potential to
execute double-spending would fundamentally undermine the
trust in a cryptocurrency like Bitcoin or any other blockchain
database.
• A related analogy for explaining this conundrum is the “Byzantine
Generals Problem”, which addresses the challenge multiple
parties that do not trust each other face when they undertake a
joint venture in which they need to cooperate to succeed.
• The Byzantine Generals Problem is a thought experiment to
illustrate the issue of disagreement between players in a
decentralised system. In this comparison, only a coordinated
attack by all generals each controlling his own army leads to
victory. As soon as one general defects or attacks another general,
the battle is lost.
Double-spending
• Consequently, cryptocurrencies need to have Byzantine Fault Tolerance
(BFT) built into their protocol. Byzantine fault tolerance (BFT) means that
a computer system has to keep functioning to a level of satisfaction if
errors or breakdowns occur, even if some participants don’t behave
according to plan and try to cheat the system.
• In line with this, ownership structures of cryptocurrencies are recorded in
the blockchain, a public ledger, while being simultaneously confirmed by
cryptographic protocols and the cryptocurrency community.
• As all transactions are openly recorded and cryptographically secured in
an open ledger running simultaneously on thousands of computers all
over the globe, everyone sees the transactions that have already been
made.
• In the case of Bitcoin, transactions are verified by miners who ensure
that all transactions during the verification process are irreversible, final
and cannot be modified computationally, thus successfully solving the
issue of potential double-spending.
• Blockchain technology prevents double-spending through
peer-to-peer file-sharing technology combined with public-
key cryptography.
What is
Bitcoin?
Bitcoin (BTC) is the world’s first cryptocurrency that
paved the way for all other cryptocurrencies to
follow. Created in 2008 by Satoshi Nakamoto,
Bitcoin is currently the best-known and most
popular cryptocurrency in circulation.

• Bitcoin is a decentralised, 100% digital currency

• The invention of Bitcoin is one of the first examples of
applied blockchain technology
• Bitcoin is the world’s most popular cryptocurrency,
both in terms of market capitalisation and brand
awareness
• The Bitcoin price reached its all-time high on November
10, 2021, at around €66.233,02
• Supply is limited to a fixed number of 21,000,000
Bitcoin
What is Bitcoin?
• Bitcoin is a digital currency that was created to
establish a peer-to-peer electronic payment system
that enables one party to send a payment to another
party without having to go through a central
authority like a financial institution.
• Next to functioning as a currency, some treat Bitcoin
as an investment and buy it on exchanges like they
would stocks, with the expectation that the value
will increase over time.
• Since Bitcoin is a decentralised community and an
open source project, anyone can join and participate
in its development.
Bitcoin use cases

• Bitcoin is a digital currency that can be used for payments

between peers and in some cases to pay for goods and
services.
• Bitcoin is an investment that can be stored for value.
• Bitcoin’s open-source technology makes it a resource and
inspiration for others who want to develop something
similar.
• BTC definition
BTC is the exchange code of Bitcoin. It’s often used in
place of the full written out version, Bitcoin (BTC)
because it’s space-saving. In the media you often see
Bitcoin and BTC being used interchangeably.
• Bitcoin history
The idea for Bitcoin was conceived by a person or a group
under the pseudonym Satoshi Nakamoto. The open
source project was outlined in a white paper
titled Bitcoin: A Peer-to-Peer Electronic Cash System.
Within the first few weeks of January 2009, Bitcoin had
completed the first major steps: mining, i.e. the creation
of the first coins, had begun; the coins went into
circulation and the first transaction using only Bitcoin
was completed. Another big milestone was reached on
May 22, 2010, when someone online paid someone else
to buy them a pizza in Bitcoin, which is now known
fondly as Bitcoin Pizza Day.
How does
Bitcoin work?

Bitcoin runs on a
technology known as a
blockchain, which is a
digital ledger where Bitcoin
can be securely stored and
exchanged. The trust in
Bitcoin is vested in the fact
that all transactions are
recorded and visible in the
Bitcoin blockchain.
Mining and Proof-of-Work (PoW)
• Bitcoin transactions and the creation of new Bitcoin are validated
through a process called mining. Mining relies on software
applications that run on specifically designed computers.
Transactions trigger the opening of a block, the transaction
information is entered, and the block closes and creates a hash
number that includes the encoded details from the transaction.
Each new block contains information from the previous block to
create a chain that cannot be manipulated or altered and ensures
that no one can spend the same unit of the currency twice.
A Proof-of-Work (PoW) system, in which the computers need to
prove the energy expended in the mining process, ensures that
everything is valid and correct.

• Bitcoin runs on a secure technology called blockchain

• Bitcoin transactions and the creation of new Bitcoin happen
through a process called mining
• Bitcoin activity is validated through a Proof-of-Work (PoW) system
How to buy Bitcoin?
• People who want to buy Bitcoin can do so through
cryptocurrency exchanges like Bitpanda using fiat
currencies, e.g. euros or U.S. dollars.
• It’s a good idea to first get familiar with the
Bitpanda price history and the current exchange
rate.
• Once purchased, your Bitcoin investment can be
viewed and accessed in a digital wallet that acts
similarly to a banking app.
• You then have the option to hold on to your Bitcoin
or sell it again via the exchange.
What is the Bitcoin price history?
• Bitcoin is considered to be a highly volatile asset and its
price has fluctuated through many highs and lows
throughout its existence.
• In 2011, the price for one Bitcoin started at around €0,29
and increased to around €5,13 that year. The price
started at around €12,95 in 2013 and increased to
€749,99 by the next year.
• After that, the cryptocurrency market experienced a
turbulent dip. Though Bitcoin reached its first all-time
high of circa €19.269 in December 2017, the price
decreased by 81% by the start of 2019.
• At the moment Bitcoin is experiencing an average daily
high of €19,945.70. The all-time high of the Bitcoin price
was on November 10, 2021, at around €66.233,02.
Where can you use Bitcoin?
• Bitcoin is primarily used as a peer-to-peer payment system
between individuals, however, the places where you can use
Bitcoin have expanded in recent years.
• More and more businesses, from large corporations like
Expedia to small and medium-sized businesses (SMEs),
accept Bitcoin as a digital payment.
• Countries are also slowly embracing Bitcoin: El Salvador is
one of the first to have adopted Bitcoin as an official
currency.
• Currently one of the easier ways to use Bitcoin is to load it
onto a cryptocurrency debit card and use that on goods and
services or to withdraw cash from ATMs.
What are the risks involved with
Bitcoin?
• The biggest concerns connected to Bitcoin are risks related to
hacking, fraud and the lack of regulation. The cryptocurrency
market is highly volatile and the Bitcoin price can fluctuate
greatly.
• Due to its unprecedented boom, regulation for Bitcoin and other
cryptocurrencies has also been slow to be developed, leaving
large portions of the market unregulated.
• This can lead to pump and dump schemes, where small groups of
investors put a lot of money into cryptos like Bitcoin to artificially
inflate the price, only to later sell it at a profit before the price
falls again.

• Though hacking is uncommon thanks to the security of blockchain

technology, there are Bitcoin-related crimes where scammers will
ask you to pay in Bitcoin or offer you a too-good-to-be-true way
of making more Bitcoin.
• Here it is advised to use your best judgement and to only buy
Bitcoin through verified exchanges.
Why is Bitcoin popular?
• As the world’s first cryptocurrency, Bitcoin has retained its
status of being the most widely known and therefore most
widely accepted and used cryptocurrency.
• Bitcoin there receives nearly limitless attention, from its
loyal followers and communities, neverending media
coverage and high-profile celebrity endorsements.
• This is because Bitcoin has had time to establish itself and
prove its worth as a viable alternative currency. When
celebrities like Elon Musk talk about the coin, it only
reinforces its credibility.
• This is how Bitcoin has become more than just a payment
system. It’s now close to a lifestyle for some people, who
spend most of their time trading and talking about Bitcoin
online.
Can Bitcoin be used for nefarious
purposes?
• Just like traditional fiat money, Bitcoin is also used by
criminals. However, unlike transactions with paper
money, Bitcoin transactions can be viewed and traced
by anyone.
• Despite Bitcoin often being associated in the media
with the dark net and underground activity, the
cryptocurrency is poorly suited for such purposes.
• There are specialised companies that help government
agencies track shady cryptocurrency transactions.
• The fact that the Bitcoin public ledger is transparent
and all transactions are visible creates trust in a world
full of deception.