Cryptocurrencies have attracted a huge amount of media attention recently. The most well-known currency is Bitcoin but there are numerous others. A lot of the media discussion, however, is ill-informed and focuses on issues that are not properly understood.
The term cryptocurrency refers to digital forms of token exchange. Cryptocurrencies are protected by a cryptographic framework, which means that the supply of currency is limited and transactions are tracked and logged in a ledger that cannot be modified once it has been written. There is a limit at which no more currency can be made (mined) and no more tokens can be issued.
These currencies are entirely virtual. There is no physical form, and the value is limited to the digital transaction. Bitcoin is held in a wallet, which might be stored on your own personal hard drive or on a server “in the cloud”. Each Bitcoin wallet automatically synchronises a ledger that holds all of the transactions that have ever happened. Users that hold this log are, for the most part, just users – and because there are so many of them it becomes almost impossible for the authorities to crack down on use. The synchronisation ensures that fake transactions are near-impossible, and money can be sent from one wallet to the next in a secure and relatively anonymous fashion. Each wallet is linked to a private key, which is a sophisticated form of passcode that proves that the holder of the key owns that wallet and those bitcoins. Loss of the wallet means loss of the coins.
Some key points to remember:
- There is a limit to the number of coins that can be issued per currency, and this limit cannot be changed.
- Transaction times are based on the technology of the network, and are fast for some, but have scaling problems for others
- Transactions are secure and so are wallets. However, if a wallet is lost the coins in it are lost. If an attacker acquires a wallet and the private key, they control the money.
- Wallets can be made more secure by storing the private key offline, even on paper.
The Boom in Bitcoin
There are more than one thousand cryptocurrencies – many of which are simply copies of Bitcoin’s code with a few changes. Only a few of them are truly popular – Eth, Litecoin, Bitcoin Cash, for example. These are stable, currencies, and they are popular and are being mined or used by a large number of people in data centres using SWL2500EFR batteries 24/7.
Bitcoin climbed in value from less than a dollar in 2009 up to more than $20,000 in 2017. Now, at the start of 2018 it is stable around $8,000. Holding cryptocurrencies is something that is done on a speculative basis rather than a major form of long term investment. Cryptocurrencies have a value that is based purely on what other people think it should have, and what the users are doing with it. Concerns about the value of Tether (a currency based on the value of the US dollar, that a lot of exchanges use as an instrument and to back their Bitcoins) are weighing on the value of the cryptocurrencies as well.
The unprecedented rise in interest in cryptocurrency means that legislators are starting to take an interest in it. Trading is becoming regulated. Arbitrage is getting harder. The perception of cryptos as a way to buy drugs or do things that you would not want people to know about is fading. There is still value in cryptocurrencies for trading across borders with fast, effective and affordable fees, but the long term value of cryptocurrencies remains something that is questionable. One thing is for sure, it’s worth watching them, and there could be some value to getting in on them early.