With the Mt. Gox disaster fresh in mind, more people are thinking about cryptocurrency and its implications, with Bitcoin at the forefront of speculation. The idea behind it is clever and has many potential advantages, but is it really a viable currency? How did Bitcoin come about, what are its uses, and what does the future hold for it?
The original notion of Bitcoin came into the light in late 2008 in a paper published by Satoshi Nakamoto. No one really knows anything about Satoshi Nakamoto’s identity. It could be a person, or it could be a group of people. Whatever the case, the paper gained attention because it explained cryptocurrency as “a breakthrough in using software code to authenticate and protect transactions without resorting to a centralized bank or government treasury,” as The New York Times put it.
When Bitcoin made its debut, the currency's value was next to nothing. Three months after the establishment of a Bitcoin marketplace, one individual used bitcoins to buy a pizza. The price in bitcoins for that dinner? 10,000. In late 2013, however, the value of a single bitcoin hit an all-time high of about $1,200.
How it Works
As mentioned earlier, this kind of cryptocurrency has no centralized monetary authority. Rather, it’s based on a peer-to-peer network of computers. Economist explains, “Bitcoins are mathematically generated as the computers in this network execute difficult number-crunching tasks, a procedure known as Bitcoin ‘mining.’” The total number of bitcoins mined will never exceed 21 million.
Bitcoin exchanges allow users to exchange bitcoins for traditional forms of money. What determines the value of a bitcoin? Good old supply and demand. As demand climbs, so does the price of a bitcoin. As demand falls, bitcoins lose value.
That all might seem kind of complex compared to the greenbacks in your wallet, but the Bitcoin system comes with some definite advantages. Bitcoins make it simple to settle international transactions without fussing with currency exchange rates. Also, since Bitcoin doesn’t depend on any government, it isn’t affected by governmental financial woes.
Bitcoin use does have a darker side. Shady characters take advantage of the system to carry out money laundering and other schemes.
Who accepts bitcoins as payment? A growing list of businesses see the perks of Bitcoin and welcome it. Such businesses include Overstock.com, Virgin Galactic, Wordpress, and The Pirate Bay. One car dealership even recently accepted Bitcoin when selling a Tesla. Also, as Bitcoin continues its rise, more casinos are considering allowing people to use cryptocurrency in casinos.
If you decide to give Bitcoin a try, it doesn’t mean you’re locked into using it forever, thanks to the many exchange services. As convenient as they are, however, they do come with risks. Mt. Gox was one of the major Bitcoin exchangers, and they abruptly went offline in February, leaving a million customers with no way to access their money, which totalled hundreds of millions of dollars. The Mt. Gox debacle happened because of a nasty security breach.
Not all exchanges face that kind of turmoil. Anyone who wants to buy or exchange bitcoins has plenty of options, but before leaping in, it’s wise to become familiar with practices that help keep a digital wallet secure.
Watch the video about securing a digital wallet:
The Future of Cryptocurrency
With the volatile price of bitcoins and the potential security risks, it’s too easy to dismiss Bitcoin as a trend that’s bound for failure. However, as technology marches forward, so does the appeal of a system like Bitcoin. Whether or not its use will ever rival that of traditional currency is debatable, but the possibility is certainly there.
While Bitcoin is the most prominent form of cryptocurrency, other forms do exist. Like Bitcoin, they each have their strong points and risks. For example, the Royal Canadian Mint created MintChip, a smartcard that can securely transfer value. Some may not like that it’s backed by a government, but that very same fact gains trust from others. Litecoin and Ripple also have strong potential futures in the cryptocurrency world.
It seems like cryptocurrency is here to stay for a while, and eventually it could be as normal as the crumpled dollar bill in your pocket. Until that time comes, however, expect the crytpocurrency roller coaster to continue its wild and unpredictable ride.