Cryptocurrencies made the headlines this week as they came under the scrutiny of US financial regulators. These regulators believe that trading in “coins” actually holds the same level of risk as trading on the stock market, a statement that has sent shockwaves through the digital currency industry. What all this comes down to is that these authorities believe that Bitcoins and all those digital currencies like them are “behaving more like an investment than simply a way to pay”.
This is a situation being closely monitored by the Bank of England but you may be wondering what on earth all this has to do with you. Well, cryptocurrencies are becoming increasingly common as a from of payment, expecially transnationally as it’s a form of payment that does not recognise boarders. If you work in the freelance world, then the chances are that you have already come across cryptocurrencies…and if you haven’t you most likely will in the next year or so.
However, as they are becoming more widely used I am being asked more and more just what is a cryptocurrency? Well here is my guide to what you need to know.
What is a cryptocurrency?
A cryptocurrency is basically a digital asset. It works as a unit to exchange in the same way as any other currency but the key difference is that unlike in traditional banking systems, many cryptocurrencies such as Bitcoin are completely decentralised. This means that local governments have absolutely no control over them. In its most basic form, electricity turns into code which in turn has monetary value, making it a digital currency. However some are still centralised so it’s worth a little research before investing or using them.
Either way, this digital currency uses cryptography as its security which makes it extremely difficult to counterfeit. However, as it is completely digital then it is also vulnerable to the same threats as any other software such as a computer crash, lack of back up files and to hacking all of which feature heavily in its history.
So, why use cryptocurrencies?
Not only do cryptocurrencies have comparable properties in the form of ‘banknotes’ and ‘coins’ as more traditional physical currencies but as mentioned before it is decentralised. This means there is no governmental ownership of the currency and therefore is not only outside of government interference and control, but it also means that there are no borders when it comes to transferring assets. This in turn allows for instant transfers saving participants both time and money.
A little about its history
Established in 2009 with the creation of Bitcoin, cryptocurrencies have grown since then and there are now hundreds of currencies available. Though only a handful have reached above $10 million on the market. However – unlike fiat currencies – over time cryptocurrencies are designed to decrease in production which creates a market cap. This is because you cannot simply print more money like you can more traditional currencies but it does also mean that they are protected from inflation.
What it does mean though is that cryptocurrencies area a supply and demand business which makes the ‘coin’ value of each currency open to fluctuations.
So, how are cryptocurrencies created then?
We don’t want to go into too much detail here as you could write about it all day, but the basics are that they cryptocurrencies are mined for. Miners use their computer hardware to solve complex cryptologic puzzles and once solved, that builds a block to add to a blockchain. Anyone can mine, but only valid blocks will be added into the network.
In this process, they can add a coinbase which is how the currency is created. Only validated miners can take part in this process and the more powerful the hardware used, the faster complex puzzles can be solved which in turn can generate more blocks for a bigger blockchain.
What does the future hold?
Up until this week, cryptocurrency enthusiasts would be adamant that this was the future of commerce and trade. In fact there are already companies in the UK who will take them as payment for goods. A global currency that has no exchange rate, no boarders, no fees and no involvement of the banks sounds almost too good to be true. There is limited consumer use at the moment but this is set to change in the coming years as cryptocurrencies become more commonplace.
Sadly though, there is a darker side as digital currencies are riddled fraud, therefore if you are thinking of investing either in currency or mining, then it’s worth doing a lot of research before doing so. There are unfortunately a lot of organisations out there riding the success of Bitcoin and scamming investors, so if you are not 100% sure about what you are being told, then it’s worth speaking to an expert in the field.
However, what is clear is that the governing bodies both in the US and the UK are standing up and starting to take notice, with a report on the impact of cryptocurrencies due out later this year. Will they come under more regulation and will this hinder it’s amazing growth to date? I guess we will have to see.