With all the recent news about Bitcoin, you may be wondering if this type of currency is worth investing in. But what is Bitcoin and its other currencies like it?
“Investing and trading in any currency requires the knowledge and confidence in its underlying value,” advises Richard Cayne. “With cryptocurrencies like Bitcoin, additional understanding is required. There are opportunities to make a profit.”
Cryptocurrency? Digital currency? Virtual currency?
For the sake of clarity, Bitcoin is a type of cryptocurrency. The terms “digital currency” and “virtual currency” are imprecise and are often used to refer to other representations of traditional (or fiat) currencies (e.g. funds in online transactions). And there are those that consider cryptocurrencies as a subcategory of digital and virtual currencies.
Where they are all similar is that they are currencies in that they are assets that can be used as a form of exchange. Or money. Where they diverge is that cryptocurrency is created and controlled through computer code and cryptography.
So, instead of it being printed or minted by a government that also backs its value, a cryptocurrency is mined by completing some predetermined task, usually some sort of complex computation. This is meant to control the overall amount of the cryptocurrency in circulation.
Also, cryptocurrency users and traders can track it through a decentralised system known as a blockchain. Many people think that blockchains and cryptocurrencies are part and parcel, but actually, the technology and concepts behind blockchains allows for a wide range of applications, which will be discussed in another article.
For the more technology-obsessed, cryptocurrencies seem to be the next step in finance. Because the blockchain database that is used to track transactions is public and not centralised (transactions are validated by members of that cryptocurrencies community), these transactions are theoretically transparent and the parties can be held accountable. However, because it is not regulated and true identities are not required, cryptocurrencies can be used anonymously, so many governments have tarred them as the exchange method for black or grey market transactions. This is not necessarily the case.
Many governments, including the United States, are beginning to understand that cryptocurrencies are becoming more mainstream, which is evident by how many reputable businesses are accepting Bitcoin and other cryptocurrencies for their transactions. However, there are still some issues as to regulation and, of course, taxation.
An interesting, but not perfect, solution
This is definitely new territory, but there is a lot of information available for you to read up on the workings of cryptocurrencies. There is an index that tracks them out of Humboldt University in Berlin. The United States’ Commodities and Futures Trading Commission regularly discusses cryptocurrencies as the US tries to decide their status, as there is an ongoing dispute as to whether they are true currencies or commodities.
As you can see, there is still a lot to learn and discuss about cryptocurrencies.