What is Crytpocurrrency and Should You Purchase It?

Digital coins are gaining popularity. Should you cash in?

In recent years, Bitcoin has become a hot topic. It has moved from the obscure world of cryptographers to the mainstream consciousness. Most everyone knows that Bitcoin is a digital currency, or cryptocurrency, that can be used to purchase various items. But there are still many questions surrounding Bitcoin and other cryptocurrencies. How do they work? What can you use them for? Are they a safe and worthy investment?

Bitcoin functions using blockchain technology. It was invented with the express purpose of creating Bitcoin by a mysterious figure called Satoshi Nakamoto. The pseudonym only appeared on a research paper in an obscure cryptography listserv and is shrouded in mystery. No one really knows who created Bitcoin. But the blockchain technology that powers the cryptocurrency is completely knowable.

Blockchain is a rather simple concept on the surface. A block refers to a record of new transactions. Once a block is completed, it is added to the chain. Resulting in a chain of blocks, or blockchain. The entire blockchain is encrypted, which prevents anyone from going back and changing entries. This means every purchase you make with Bitcoin is completely secure. Because Bitcoin is encrypted processing any transaction means solving complex math problems. People who complete these equations using a computer are rewarded with Bitcoin, in a process called mining. This is the only way the blockchain can be updated.

Additionally, there are no legal identities tied to Bitcoin transactions, only key numbers. So all of your purchases will be completely private as well. If you own Bitcoin, you really own a private key (or an incredibly complicated password) to its address on the blockchain. Using your key, you can spend currency. Each account has a public key too, which gives everyone the ability to send currency to your account. Information on the blockchain is also publicly accessible. It's completely decentralized so it doesn't rely on any one single computer or server to function.

In this way, blockchain technology functions as a public transaction ledger. Bitcoin and other cryptocurrencies have been seen as an alternative to traditional banking. No need to rely on a government or banking institution to verify your transfer. Blockchain eliminates the middle man.

But there are drawbacks to cryptocurrency. Its complete security and anonymity prevents you from recovering your currency if you somehow lose your private key. With no central regulator, it can be a volatile environment. Scams and market manipulation are fairly common. One big example is OneCoin, which was revealed as a Ponzi scheme rather than a new up and coming cryptocurrency. Because a blockchain is complex, encrypted, and distributed across many servers and computers, it can take several hours to finalize a transaction — compared to seconds with debit or credit cards. Not too convenient. Another drawback is that the current financial institutions aren't likely to support these new currencies. Banks earn healthy profits by being the middle man and governments are unlikely to accept Bitcoin payments for taxes. This means that cryptocurrencies aren't likely to become mainstream currencies any time soon.

But is it a useful investment? Bitcoin's value seems to only be rising. One positive of buying this cryptocurrency is that it has a predetermined supply amount. It is expected that around 2140, Bitcoin will reach its maximum limit of 21 million Bitcoins. And the Bitcoin protocol prevents excessive mining to keep the growth of the supply steady and constant. It seems that Bitcoin itself would be more stable in terms of inflation than government-backed currencies, which can be printed in excess or distributed less readily based on the whims of the current administration. However, not all cryptocurrencies function this way. There are plenty of alternatives out there, but Bitcoin has a head start on most of them for having been around for 9 years without too many issues.

If you're going to purchase cryptocurrency, Bitcoin is probably the best investment. The current value is much higher than other cryptocurrencies, but it has the most marketplaces and vendors available. Then again, perhaps a more niche coin will work better for your uses. But Bitcoin is practically ubiquitous and will likely only continue to rise in value. If you're looking to purchase some and hold on to it, Bitcoin is likely your best bet.

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