Bankruptcy Risk and Fraud In Cryptocurrency

Cryptocurrency can be a little hard to understand for those not acquainted with the field. Some definitions of terms are helpful. A "cryptocoin" is a unit recorded on a cryptographic distributed ledger. A "distributed ledger" is a digital ledger that is recorded on many nodes or computer databases on the internet at once, for which transactions may only be made by someone using the cryptographic private key. Transactions on the distributed ledger are verified either by third parties solving an algorithm for which they are rewarded a coin, a process known as "mining," or by using a "consensus" system in which nodes are compared and outliers (which represent likely fraud) are eliminated. "Cold storage" is keeping one's private key either on a personally controlled hard drive or in a secure writing. The permanent loss of a private key locks an address on the distributed ledger so that the coin can no longer be transferred, essentially permanently eliminating it from circulation and reducing its value to zero.

The seminal idea behind cryptocurrency, as expressed in "Bitcoin: A Peer-to-Peer Electronic Cash System" by Satoshi Nakamoto, was to eliminate the cost of mediation and the ability of third-party intermediaries to "reverse" transactions, making trust an unnecessary feature of transacting, without the burdens of using a physical currency.