Resident discusses cryptocurrency at Women’s Club of Glen Ridge event

GLEN RIDGE, NJ — In celebration of Henry Chapman Night — a night dedicated to Henry S. Chapman, 1837-1926, a chief benefactor of the Women’s Club of Glen Ridge — the club welcomed resident Kris Ramanathan to speak. On Friday, March 4, Ramanathan, the CEO of software company Netomat Inc., discussed cryptocurrency.

According to Ramanathan during his presentation and in a subsequent interview with The Glen Ridge Paper, bitcoin, the first and most familiar cryptocurrency, had its genesis not as a way of buying and selling, but for the safeguarding of documents transmitted via the internet.

In 1991, two Bell Labs researchers, Stuart Haber and W. Scott Stornetta, devised a way to transmit a document via the internet for storage so that it always remained unique; with their system, altering the file would be practically impossible. 

They represented the document online by what is called a hash, which is a 256-character, alphanumeric string. It was time-stamped, used for storage-only purposes and known as a one-way hash. It could not be decrypted and was immutable. One-way hashes were then aggregated and strung together in what is known as a blockchain. The documents might be bank documents, research papers, official records, financial transactions or anything else. 

Enter Satoshi Nakamoto. Ramanthan said the name was a pseudonym for an individual or a group — no one really knows. Nonetheless, it was Nakamoto who introduced the cryptocurrency bitcoin. Ramanathan said the concept of digital currencies had been around for a while, but there was a big problem keeping it from becoming a reality: There was no way to prove someone was not duplicating the currency and spending it again. To remedy the problem, Nakamoto validated electronic transactions that used time-stamped hashes connected into blockchains. Since everything was being done electronically, it was reasoned, why not make the payment to a transaction validator also electronic? 

But Ramanthan said there was also the question of how to do this without having a trusted middleman, such as a banker. That was where the blockchain came in. Since the transactions were available to all participants on the blockchain network running the same software, if they agreed it was a valid transaction, then the consensus validated the transaction. In effect, the consensus is the middleman. 

“Security of financial transactions is the underpinning of bitcoin,” Ramanathan said. “You get rewarded by being a validator of the transaction, and bitcoin is an electronic payment based on cryptocurrencies. It’s a fast payment system without a middleman.”

The validators of the transactions stored in blockchains are called miners. But in order to be allowed to validate, the miner has to be able to solve a mathematical puzzle. According to Ramanathan, the formula for the puzzle was created by Nakamoto. The first miner to solve the puzzle has the right to validate a block chain.

Miners are not individuals, Ramanathan said. They are computers using considerable electricity and are an environmental issue because of the energy they require. Bitcoin farms have been established in colder countries because of the heat they generate. Ramanathan said the power of the computers is great to lessen the threat of tampering with transactions.

There are only 21 million existing bitcoins and not all are being used, Ramanathan said. With the price of one bitcoin selling for almost $37,000 this past Monday, March 7, the fee for performing a bitcoin transaction is quite high. Consequently, they are generally used only in the buying and selling of big-ticket items rather than everyday transactions.

Ramanathan also said that cryptocurrency, for tax purposes, is not considered to be money, but an asset. 

“Therefore, switching from one cryptocurrency to another is like selling the stock of one company and buying another,” he said. “Any profits would be considered capital gains by the IRS.”

Regarding the insurance for a cryptocurrency asset, Ramanathan said that, for the most part, there is none.

“At least not anything equivalent to the Federal Deposit Insurance Corp.,” he said. “A couple of the ‘wallets’ that allow you to store your cryptocurrency holdings offer some limited insurance in case your account gets hacked. Some companies also are starting to offer insurance policies that you can buy to protect against criminal cryptocurrency losses, but this is still very nascent and expensive.”

The FDIC was created by Congress to ensure confidence in financial institutions. In the cryptocurrency market, a wallet is an online storage service for cryptocurrency users.

  FEATURED, Glen Ridge Women’s Club