Money has taken a variety of forms throughout history: thousands of years ago, humans started using shells and beads on a string as measures of value, then we advanced to lumps of metal and slips of paper, and now we’re entering a new era of cryptocurrencies like bitcoin.
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Cryptocurrencies are an advanced form of virtual money that are increasingly being seen as the currency of the future. Virtual money has, of course, been around for many years. Most of us see money as actual notes and coins, but there are not enough notes and coins to meet every transaction that takes place. Every time you use your credit card or do an electronic funds transfer you are using virtual money – money that does not exist as notes and coins. In fact, actual tangible cash is increasingly being seen as having a limited future. Th e move from physical to virtual cash has been based on trust – you trust that the money you pay to someone else for whatever reason will be received by that party. If you pay someone with a credit card or electronic funds transfer you trust a third party, most times a bank, to eff ect that payment for you.
Banks charge you for that service, and sometimes quite a lot. You are also placing your trust in a single institution not to steal the money or screw up the transaction. Th e claim of cryptocurrency proponents is that, through the use of sophisticated technology, they can make transactions cheaper and more reliable. Bitcoin has widely been used for dodgy dealings (for example online cannabis sales), but the currency is being accepted by a growing number of major brands, such as Paypal and Microsoft. Th e problem with cryptocurrencies is that they are very volatile, meaning you could end up with substantial losses if you’re not careful. Bitcoin launched in 2009 and remains the biggest and best known. The coin was created by Satoshi Nakamoto, a fictitious man said to be living in Japan. It is believed the actual founders are a group of cryptography and computer science experts living in the United States and Europe. Nakamoto is believed to own about one million bitcoins, most of which came from mining the early Bitcoin blocks.
There are now more than 1 000 cryptocurrencies in existence; after M Bitcoin, the biggest include Ethereum, Bitcoin Cash (a newly introduced, more scalable version of Bitcoin, offering much faster transaction processing), Ripple, Litecoin, NEM and Dash. The first thing you need to understand about cryptocurrencies is how blockchain technology works. A cryptocurrency ‘blockchain’ is a public ledger (anyone can access it) that keeps track of every transaction carried out using that cryptocurrency. The blockchain, however, does not keep the personal details of anyone or any institution involved in a transaction. A ‘block’ is a defined number of transactions which is closed off when it reaches its maximum and put away in ‘folders’, and the records cannot be altered. New ‘blocks’ of transactions are constantly being added – so they become a chain of blocks or a blockchain. Blockchains are decentralised databases that are managed by computers belonging to what is called a peer-to-peer network.
By using multiple computers in a network, the chances of data being lost are close to zero. Any computer (miner) connected to a cryptocurrency network performs the task of validating and processing transactions. Each miner receives a copy of a block, which is downloaded automatically when joining the cryptocurrency network. Miners are the virtual bookkeepers who record every transaction in a virtual ledger (the blockchain). The miners ensure that no cryptocurrency is spent twice or stolen, and that no personal data is exposed. If one miner attempts to alter the records or simply made a mistake with an entry, that block record will not match the miners participating in the same block. The miner of the faulty block will have to discard their version of the block and copy the correct one from someone else. Unless this happens the miner will not have access to the block or blockchain in the future. The miners earn their money from a ‘reward’ they are paid (about 25 bitcoins) for mining a block and sometimes a transaction fee. However the cost to you for a transaction is about one US cent – far cheaper than any bank transaction.
The problem with cryptocurrencies is that they are very volatile, meaning you could end up with substantial losses if you’re not careful.