We’re on a mission to help you take control of your personal finances. Understanding the different financial opportunities out there will help you handle your finances confidently. One of those often discussed financial opportunities is cryptocurrencies – specifically Bitcoin. Understanding the complexities of cryptocurrencies like Bitcoin requires a fair amount of research. But the basics aren’t too complex. Let’s dip our toes into the ocean that is the topic of cryptocurrency.
What are Bitcoins?
Okay, so what exactly is Bitcoin?
Bitcoin is the first among many other cryptocurrencies. It was created in 2008 by Satoshi Nakamoto – an assumed pseudonym. No one knows who Satoshi Nakamoto is, though there have been several proposed founders of Bitcoin. You can learn more about Satoshi Nakamoto and the creating of Bitcoins by reading this Wikipedia entry.
While Bitcoin is the most highly valued and well-known cryptocurrency there are several other stable cryptocurrencies out there. A few other popular cryptocurrencies include Etherium, Litecoin, Maker & Dash. You’ll notice that these cryptocurrencies have a considerably lower value per coin.
So what is a cryptocurrency?
Investopedia defines cryptocurrency as: “a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.”
Unlike every other currency, cryptocurrencies are not issued by any government, agency, or central bank. Instead, cryptocurrency is traded peer to peer, or acquired through a process known as mining. They are entirely digital – they exist only in 1s and 0s.
How in the world do you “mine” a digital or virtual currency? Usually what comes to mind when you hear the word mining is some hard rock and a sharp, metal pickaxe. But that’s not what we mean by mining when it comes to Bitcoin.
Bitcoins are collected through the use of high-powered computers that solve incredibly complex math problems. When the problems are solved the miner has an opportunity to be rewarded with some Bitcoins. These math problems are so complex that they are impossible to solve without the use of a computer. But even with a high-powered computer, your chances of striking Bitcoin gold are low – way low. As in, you have a better chance of winning the lottery than you do ever stumbling onto a bitcoin. That’s why many entrepreneurial people have created cryptocurrency mining companies, leveraging more specially designed mining computers to increase their chances of getting more coins.
How are these coins tracked?
The coins are accounted for using a distributed ledger system known as blockchain. The same machines that Because the coins are not processed through a central agency and are protected with encryption, people are able to use the coins without being tracked.
What makes Bitcoins worth anything?
Okay, so if Bitcoins aren’t physical what makes them valuable? We understand that diamonds are valuable because they’re rare. We understand the value of a home because of the work involved in created and maintaining a home. But how can a series of 1s and 0s be worth anything?
A number of things contribute to the value of cryptocurrencies, but the foundational thing is that people recognize it as valuable. People being willing to exchange cash, products, or services in exchange for Bitcoins demonstrates its value. A continuously growing number of people and businesses accept Bitcoin as a payment option.
So valuable, Russia wants to establish itself as a leader in the industry
The technology behind blockchain and cryptocurrencies has been lauded by many as a culture-shifting technology comparable to the internet in its impact. Whole countries are striving to get a handle on cryptocurrencies. Russia has been working hard to establish itself as a leader in the industry. Cryptocurrencies were mocked at the founding, but they continue to endure the test of time.
Pros and Cons of Bitcoins
Private & Secure:
A number of people have a growing concern for their privacy and the protection of their data. Because cryptocurrencies are exchanged on a decentralized network, there is no one server that is tracking the exchange of currency. Additionally, no personal information is needed to exchange cryptocurrency.
Cryptocurrencies like Bitcoin are stored in what’s called a coin wallet. These wallets can either be physical or digital. The physical options like a hardware-based wallet, or paper-based currency are the most secure in that they are not accessible to hackers. Any online or desktop-based wallet solution leaves your wallet vulnerable to hackers.
Can’t be Counterfeited:
Another perk of cryptocurrencies like Bitcoin is that they cannot be counterfeited. There is a finite number of potential Bitcoins. There is no agency that can create more, like the Fed in the USA. Every coin is tracked and validated by a decentralized network of computers. Unlike paper money, every bit of every coin is unique and therefore easily identifiable.
Cryptocurrencies are still relatively new causing their value to be pretty volatile. At the time of writing this article, Bitcoins were worth around $9,400.00 each, but within the last month, they’ve fluctuated by hundreds of dollars. Their record high was around $20k in 2017. Some people believe Bitcoins will see those numbers again. But it’s a gamble. The situation is made even more uncertain, given the current destabilization of the global economy. Bitcoin still has to prove itself stable before anyone can confidently invest.
Fears of Illegal Use:
Because of the decentralized nature & anonymity provided by cryptocurrencies, many people fear that they may be used to finance illegal activity. One Oxford University study suggested that maybe 46% of all bitcoin traffic in 2017 was used for illegal activities. Of course, before Bitcoin, most illegal activities were funded by cash – which is also really hard to track and trace. The major difference between the two is that cash takes up physical space and has trackable serial numbers which cryptocurrencies don’t have.
Cryptocurrencies continue to persevere even under early and widespread criticism. Countries are being forced to adjust and create policies to address the growing use of cryptocurrencies. Time will tell if these coins are the biggest technological advancement since the internet or not, but for millions of people around the world, cryptocurrencies like Bitcoin are the future.
So what do you think?
Will cryptocurrencies are the currency of the future?
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