finance

Cryptocurrency

Written by: Penny Anthem Staff

Cryptocurrency: A Basic Understanding Through Bitcoin.

Cryptocurrency: A digital currency which uses encryption for security and operates independent of a central bank or government.

By examining the above definition we can begin to understand what digital currency is, how it’s made, and why it’s here to stay. It’s important to know that there are currently hundreds of digital currencies with nuances and differences, BUT for the sake of getting a basic understanding, we’ve chosen to focus primarily on one, Bitcoin.

Let’s try to keep things simple.

Bitcoin was the first decentralized cryptocurrency (2009) and it is currently the most popular. It is  widely accepted and  highly traded. Just like other currencies, you can buy it, sell it, and spend it. However, you can’t touch it. And that’s because it’s digital.

How do you access bitcoins?
Because there is no tangible form of virtual currency, you use something called a cryptocurrency wallet. These vary from a physical piece of hardware, to a mobile app, or can be kept on your desktop. The wallet basically stores your private key which you use to access your bitcoins. Think of it as a personal ledger thats password protected.

How are bitcoins made?
Bitcoin transactions are kept on a public ledger, known as the blockchain. This ledger is a record of bitcoins exchanged. Those who maintain this ledger, verifying that bitcoins aren’t being double spent, get paid in bitcoins.  This process is called mining, which Quartz authors described as, “competitive bookkeeping” (Quartz).

In order the verify the transactions, miners use an algorithm. The ledger is transparent, secure, and cannot be readily altered.

Anyone can maintain the ledger, or “mine” the Bitcoin, but it is highly competitive at this point and requires time, hardware, and cloud services.

Can we mine an infinite number of Bitcoin?
There are a finite number of bitcoins. Each batch or “payment” of Bitcoin is cut in half every 4 years- which means eventually it will run out. The scarcity is one aspect that many people feel gives it it’s value. Like gold- there is only a certain amount.

There are other digital currencies that are limitless in their amount.

Who controls Bitcoin?
Bitcoin is decentralized- meaning the currency isn’t controlled by banks, government, or the federal reserve. Instead decentralized digital currencies are controled by the users. The blockchain, or ledger, is open source- meaning anyone can verify and essential it’s those who use the currency that ‘control’ it collectively.

What gives Bitcoin it’s value?
Bitcoin isn’t backed by a government like a fiat currency. It isn’t backed by a precious medal like a commodity. Furthermore, you can’t pay your taxes with it, and you can’t even truly hold it. So why is it, at least currently, so damn valuable?

The simple answer is supply + demand. But then you gotta ask…well why is it in demand? The complexity of this question goes well beyond the scope of this article and there is no definitive answer. However, with that said, let’s take a look anyway.

  • Scarcity (there is a finite number)
  • It’s backed by an algorithm rather than controlled by a central authority
  • You can send money to anyone (with a digital wallet) anywhere in the world at any time. This means the transfer of money isn’t limited to a bank regulation.

In his article, Why Bitcoin Has Value, Joe Wiesenthal writes that Bitcoin is ” a currency, an equity, and a social network”. Which is pretty genius if you ask me. Basically it boils down to a currency with a community surrounding it.

What are the downsides of Bitcoin?
For starters Bitcoin isn’t that easy to understand. That’s not to say that we can’t do a better job of educating ourselves, but it something the masses are necessarily up for at this point. This in turn doesn’t necessarily encourage retailers to widely accept Bitcoin. 

Additionally it’s price/value is very volatile and currently incredibly expensive. Right now Bitcoin is valued at approx. 4,095 for every $1. Although you can spend Bitcoin in fractions, most people wouldn’t be able to afford much.

What does the future hold for Bitcoin and other cryptocurrencies?
Obviously, we haven’t acquired the ability to accurately predict the future, but we do know this: despite the downsides, Bitcoin has continued to increase in popularity and price. People have started adding cryptocurrency to their retirement portfolios, and there are rumors about the Fed creating their own virtual currency- Fedcoin. The global acceptance and increasing competition and innovation suggest virtual currency is here to stay. It might not be Bitcoin that is widely accepted, but if things continue on this trajectory, digital currency will only become more popular.

Learn more with these additional sources:
Bitcoin.org    Wiki List of Cryptocurrencies

Quartz- information about mining and ledgers

Compare Cryptocurrency Wallets      What is a cryptocurrency wallet

Advantages and Disadvantages of Bitcoin   Wiki Hashcash

What is Blockchain Technology  Getting Started with Bitcoin Mining

Google results: Is digital currency here to stay?

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