A Cryptocurrency Primer: What Does It Take to Keep Bitcoin Going?

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In the realm of economics, there are plenty of terms that might confuse the layperson, but most of us probably know what the word "money" means. "Cryptocurrency," by contrast, can be baffling. It's money, but not government-backed money? It gets mined almost magically by a process that does nothing else of value? How does that work?

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Given the level of investor interest in cryptocurrencies, for this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp brought in Motley Fool analyst Aaron Bush to give their listeners the lowdown. In this segment, they go backstage and look at the foundations upon which the bitcoin network rests: an enormous, energy-inefficient array of computer nodes. Can this system sustain itself?

A full transcript follows the video.

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This video was recorded on Nov. 21, 2017.

Alison Southwick: In theory, is it possible the computing power required to keep this going could [fall] off a cliff? If people actually start using bitcoin and it's this "forever ledger" that's housed on massive supercomputers around the world, in theory couldn't that data just blow everything up?

Aaron Bush: What do you mean?

Southwick: Let's say we're all using bitcoin. At some point does this ledger become too large for even computers to manage? Even if we're managing it right now and there's only so many billion in circulation, and we require so many nodes... I don't know how many nodes there are.

Bush: A lot.

Southwick: A lot!

Bush: Yeah.

Southwick: So, there's only this much market cap out there, and we're already requiring these massive nodes, and [at this point] it's getting even harder to get in it for your one bitcoin that you might get by being the computer that solves the puzzle...

Bush: Yes.

Southwick: That sounds like it could, in theory, go off a cliff if the data required to run bitcoin grows so exponentially as more people adopt it.

Bush: I would say the short answer is no. There definitely is a scaling problem with bitcoin right now. It's very energy inefficient.

Southwick: Yes. It costs more to mine bitcoin than to get a bitcoin that you're mining, right?

Bush: Yes. When you transact with bitcoin, the network still has to verify and go through a process that's very energy inefficient, too. The good thing about this being run by software is that you can change the code. It is an open source software project, and so there are a lot of people looking to make this more efficient.

You [then] come to something that's called "forking." We didn't talk about this at all. This is the most contentious point in the bitcoin community right now -- people disagreeing about how to make it more scalable to allow for more transactions. There are a couple of different technical ways people want to take it, but when people disagree they can fork it and then essentially the blockchain splits and starts going in two different directions based on different rules.

Right now, there's bitcoin and then the third-largest cryptocurrency right now is Bitcoin Cash, which was forked out of bitcoin in August. This is like everyone trying to tackle that scaling issue. I do think it will be done, because you can constantly improve the code to make it more efficient. We've seen that in other currencies, too, but it's a huge issue to tackle right now.

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