The cryptocurrency known as Bitcoin has become stunningly popular with investors this year as its worth in United States dollars has skyrocketed to more than ten times its value from as recent as this past January. A Bitcoin investment of slightly less than $1,000 back then has now turned into more than $12,000. This raises the question in many minds as to what exactly cryptocurrency is and how much a part of our lives it will become.
As noted by HowStuffWorks, “Bitcoin is an invisible digital currency (with no physical backing) that can be sent from one internet user to another.” Importantly, it eliminates the need for traditional banking institutions to be the central processors of financial transactions. Instead, with Bitcoin, a “blockchain works by recording financial transactions on a shared digital ledger that’s encrypted on a peer-to-peer network.” Not only does it have the potential to displace banks, it is also said to provide superior anonymity and security.
Even though Bitcoin has been the trailblazer among cryptocurrencies, it is hardly alone among them. In fact, there are over 1,000 competitors. According to a prediction on Forbes, cash may, in time, be entirely replaced by digital currencies.
This means that national currencies themselves could eventually become digitized. Russia and China have already begun developing national cryptocurrencies. As of yet, the United States has not. Although it obviously demands attention when two major world powers are working on anything, it is expected that these technologies will be piloted primarily in smaller, mostly Caribbean, countries.
HowStuffWorks points out that there are skeptics who believe that the cryptocurrency investment bubble will ultimately burst, much like the dot-com bubble once did. Indeed, on a field crowded by more than 1,000 players, it is inevitable that at least some will fail. However, on the whole, blockchain technology is seen as a potential infrastructure advancement.
Among Bitcoin’s competitors, Ethereum is more versatile beyond its use as cryptocurrency. Ethereum’s cryptocurrency, ether, is actually more limited as a usable cryptocurrency than Bitcoin. In fact, Ethereum does not even intend to replace conventional money. Instead, its focus is on using the blockchain to allow transactions of all types to be more secure.
The flexibility of this technology seems to make it unlikely that it will not become a bigger component of our financial systems. If its advantages are as advertised, everyone will benefit. Some will reap large investment gains.