Cryptocurrencies are digital currencies. A digital currency has a value just like traditional currency and it is traded on an online exchange. Cryptocurrency values are subject to investor speculation and they do fluctuate. Value can also change in response to world events, investor confidence and technology changes in the digital age.
The key point to note is that Cryptocurrencies are not controlled by any government or any central authority. Bitcoins for example can be created by participants using the software and hardware designed to ‘mine’ for coins. Bitcoin miners use cryptography to secure their transactions and create new coins. The underlying technology uses various timestamping schemes which avoids the need for a trusted third party.
Although cryptocurrencies technology is in its infancy but it is here to stay. The price of Bitcoin has skyrocketed in recent months. A single Bitcoin now trades for over $2500. It’s total market capitalization has grown to more than $70 billion. Many companies have introduced wallet apps to conduct cryptocurrency transactions in real time from mobile devices without the involvement of banks. Cryptocurrency is hailed as an alternative currency that could eliminate the middleman like banks or other financial institutions while doing transactions. However, some industry experts have also warned against the use of cryptocurrency. Due to the anonymous nature of transactions, Bitcoins are also widely used for illegal activities. Most ransomware today ask for payments in Bitcoins. This is one of the reasons that digital currencies are also looked upon with suspicion.
The technology used in cryptocurrencies is blockchain. Blockchain functions as a digital and decentralized ledger that keeps record of the peer-to-peer network. The technology has generated a lot of interest from consumers and large institutions. For consumers, using the blockchain means there will no third party fees, concerns of privacy and fear of fraud. For financial institutions, blockchain technology can help speed up their business processes.
Bitcoin and Ethereum
The value of Bitcoins and other digital currencies lies in the opportunities presented with the rise of these alternatives. Ethereum is a cryptocurrency project that has also begun to attract a lot of attention. It is not just a digital currency but instead it is a blockchain platform that provides a lot of features such as smart contracts, the Ethereum Virtual machine and enhanced security. The reward that Bitcoin miners receive for mining the currency halves about every four years. Ethereum miners on the other hand are rewarded based on its proof-of-work algorithm called Ethash, with 5 ether given for each block that is mined.