In the past few years, cryptocurrencies such as Bitcoin and Ethereum have all steadily risen in value. This wouldn’t be too strange, until you consider that none of the cryptocurrencies rely on physical resources in the same way that other currencies do.
In fact, cryptocurrencies only operate in the digital realm: bitcoins are “mined” via data-block verification, exchanges are all done via peer-to-peer networks, and cryptocurrency “wallets” are nothing more than specialized USB drives. Originally intended as an electronic cash system, cryptocurrency is now fast becoming the main currency exchange on the Internet.
What is cryptocurrency and how does it work?
Cryptocurrency, in its most basic form, is any digital currency that employs cryptography for verification. Cryptocurrencies such as Bitcoin are assets that work as an alternative medium of exchange in the digital world.
Unlike cash currencies, Bitcoin has a finite amount: Satoshi Nakamoto, the creator of Bitcoin, created a geometric series algorithm that effectively caps the creation of Bitcoins at 21 million units. Currently, only 12 million Bitcoins are in circulation. This cap ensures that Bitcoin remains a deflationary currency, one that lends itself to be redistributed amongst users.
A key element of cryptocurrency is its decentralized control; every user of a cryptocurrency all help in the regulation, book-keeping, verification and distribution of the currency. Anonymity plays a huge role in cryptocurrency as well, making it harder for governments to track.
All transactions via Bitcoin are done directly between users, with no third-party intermediaries. Each transaction is logged, verified and recorded via a public ledger called a Blockchain. Other cryptocurrencies employ similar models.
Aside from trading, users can earn Bitcoins by helping in the verification process of each Bitcoin by solving complex mathematical equations. Once an equation is solved, transactions are verified, and the user receives a certain number of Bitcoins that depreciate over time.
Bitcoins can be “mined” via open-source software and mid-range PC’s, or by joining a mining pool, where groups of miners pool together the computing power of their individual PC’s to create a digital supercomputer to mine Bitcoins.
Although a virtual currency, cryptocurrencies, specifically Bitcoins, have made real-world impact in the past few years: in October of 2017, Bitcoin reached a market value of over AU$7000, with the overall value of all bitcoins in circulation at around AU$100 billion. This surge in value puts the Bitcoin at par with blue-chip companies like Commonwealth Bank of Australia.
Because Bitcoins and cryptocurrency in general are anonymous and independent of central bank control, people often find comfort and security in investing real money into it, making cryptocurrencies a legitimate store for value.
Due to the lucrative and nominally safe cryptocurrency market, over 100,000 registered businesses have allowed the use of Bitcoins in micro-transactions. Although, because of the impossibility of regulation and the wide-spread anonymity of its users, the use of Bitcoins as payment for illegal activities has also proliferated, prompting governments like China to require Bitcoin users to register their identities before trading and exchanging in cryptocurrencies.