You may have heard the words "cryptocurrency" or "Bitcoin" before.
You may even know what they are. Pop culture has long depicted futures in which money has gone completely digital. With the growing acknowledgment of cryptocurrency, that future may not be far away.
The Dutch bank ING released an extensive survey about cryptocurrency, in September, revealing that while almost three-quarters (74%) of people know that cryptocurrency is a type of digital money, nearly the same amount of (73%) incorrectly identified the governing body for cryptocurrency, or said they did not know how it worked.
What is cryptocurrency?
Cryptocurrency is a type of digital currency secured by cryptography technology that makes it nearly impossible to counterfeit. Cryptocurrency is not controlled by any government or entity, and the middle man (AKA the bank) is cut out of the equation.
How does it work?
Cryptocurrencies allow you to make secure transfers online which are denominated in terms of tokens. Behind the scenes, the network shares a blockchain (digital ledger) that records all transactions.
How can I use cryptocurrency?
In order to buy cryptocurrency, you need an online application, known as a "wallet" to digitally store it in. This can be done through an app such as the Bitcoin Wallet, or through a free investment app such as Robinhood.
You can use your cryptocurrency to buy goods or services from many retailers and merchants that accept cryptocurrency, transfer it directly to other cryptocurrency users, or exchange it for other digital or paper currencies.Cryptocurrency can also be earned through mining, which is often referred to as the process of digitally mining for gold.
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Types of Cryptocurrency
The original Bitcoin code was developed in 2009 by the individual or group known by the anonymous pseudonym, Satoshi Nakamoto. Bitcoin is not owned by any individual or company. All users are able to use and develop the bitcoin software.
Today, Bitcoin is split into two different cryptocurrencies: the original Bitcoin (BTC) and Bitcoin Cash (BCH). The main difference between the two is that the latter was created to increase the speed of transaction processing. Some experts worry about the security of the newer Bitcoin cash, as the program doesn't necessarily follow the guidelines in programming set out by Nakamoto. As it is, Bitcoin still remains the most widely used of the two.
Since cryptocurrency operates in a decentralized manner, cutting out the middleman in currency transactions (AKA the bank) can have many benefits.
- Cryptocurrency transactions are instant and direct, unlike transfers that need to run through banks and can sometimes take days to process.
- Cutting out the need for the bank reduces inflation and reduces fees.
- Transactions are not limited by time, location, or bank holidays.
- More secure transactions from cryptographic technology.
- Cryptocurrency allows much clearer transparency since the data stored in the blockchains are available for anyone to view.
- The inability to make payments with cryptocurrency.
- Cryptocurrency is unregulated, which makes it an attractive means of illegal activity and overall is considered a high-risk investment. Cryptocurrency does not hold any intrinsic value-such as that of fiat currency backed by gold or a governing body. Berkshire Hathaway's billion-dollar CEO, Warren Buffet, is a longtime opposer of cryptocurrency. In an interview with CNBC, Buffet said that he would never invest in cryptocurrency because he believes it holds no value.
According to a 2019 survey, only 10% of people understand cryptocurrency. However, it does have backing from the SpaceX and Tesla founder, Elon Musk, who sees potential in Bitcoin. The future of cryptocurrency heavily relies on its ability to further reach into the retail economy.
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.