By Megan Miller
Bitcoin and cryptocurrencies have caught the eye of investors and regulators largely because values have soared. They are becoming more popular by the day. Unless you are familiar with cryptocurrencies and their networks, it can be difficult to understand how they work and how the innovative technology of blockchain is involved in the process.
Bitcoin originally made headlines because it was used as an anonymous way to transfer funds digitally on the black market. Cryptocurrencies have since gained more above-board traction, often used to transfer money internationally. Cryptocurrencies are considered the second generation of digital money, since most money transactions today are already digital. Think of the use of debit and credit cards, for example. Cryptocurrencies are controlled by a decentralized network of computers all around the world and are not subject to governmental oversight – so far. There are several different cryptocurrencies, but the largest by market cap are Bitcoin, Ethereum, Ripple, and Litecoin.
While advocates promote cryptocurrencies as the wave of the future, there are some downsides to consider before investing. First, pricing can be extremely volatile. Take the case of Bitcoin: In mid-December 2017, the price had soared to $19,000 per unit. Soon after, on December 22, the price dropped 30% but then popped back up 15% the following Tuesday. Second, currently cryptocurrency is not very liquid or practical for day-to-day needs, such as for buying groceries. Third, many consider the anonymity of ownership a positive, yet should you make a mistake entering a transaction on-line or a theft occurs, there is no protection, such as FDIC to cover your losses.
Blockchain – an interesting component of Bitcoin: Cryptocurrencies use Blockchain technology to function. Blockchain creates a permanent record of each transaction. Whenever a new transaction occurs within the network, other users verify the transaction, or the “block” and add it to the blockchain, the ledger of all transactions that have ever taken place within the network. This technology has two notable features. First, every user in the network has access to the ledger so blockchain is managed by the network, not any one central authority. Second, no one user is able to make a change to the ledger without verification, which prevents anyone from recording false transactions. Although currently used mostly with cryptocurrencies, blockchain technology has far wider potential for applications such as transferring property rights, stocks and currencies more efficiently than going through an intermediary and doing so securely and at a lower cost.
Sources:
Nytimes.com, “What is BitCoin, and How Does It Work?”, Nathaniel Popper, Oct 1, 2017.
WikiTribune.com, “Why Digital Money Is Here to Stay”, Miguel A Torres, Jan 4th, 2018.