Premios – Smart Markets Rotating Header Image


The Technology That Underlies Digital Currencies – What Should You Know?

If you were to look at the most talked about topics on the internet today, digital currencies would be at the top of the list, if not right at the top. Why? Because it is literally changing the way, people are spending money online. In fact, cryptocurrencies can’t be regulated (yet), and every time a new one comes along, it makes it even harder for governments to keep tabs on them. At the moment, Bitcoin is the one with the most value, and people are stumbling over each other to get their hands on them. This is because Bitcoin has become an investment that keeps on growing at an amazing rate. But it’s definitely not the only one, and the competition for better digital currencies keeps on coming.


But what should you know about the technology that underlies digital currencies? What makes them so unique and why should you be informed about it in the first place before investing, if that is your ultimate goal?


Well, it does get a little complicated, but here is a basic breakdown of how it works.

The Mathematical Twist


The first thing you have to know is that digital currencies like Bitcoin are created via highly-complex mathematical equations. And these equations require powerful computers and time to solve and create. This process is called “mining”, and people all around the world are using their computers to mine Bitcoins for them.


However, there is a major twist you need to face if Bitcoin is the one you are focused on. The creator implemented two specific limitations when he came up with the digital currency. The first is that only a certain amount of Bitcoins can be created, and the second is that only a certain amount can be generated at a single time.


Now, the more people who mine for Bitcoins, the more difficult and overcrowded it gets. As you are reading this, it takes about four years to mine one Bitcoin. So, unless you started mining when Bitcoin was still unknown, you have to be realistic about how much you can make.

Moving forward with the technology that makes up digital currencies, Bitcoin comes with what is called the blockchain. The blockchain records all the transactions that are made, so you can see it as a big virtual ledger that keeps track of everything. However, the blockchain doesn’t allow for the transactions to be traced back to the people who made them.


You see, everything gets encrypted, and every Bitcoin trader has a private and a public key. When you buy something with Bitcoin, your private key is used for the transaction, while the person you buy something from uses their public key. Once the operation is finished, everything gets encrypted again, and your Bitcoin switches ownership. This also means the Bitcoin can’t be traced back to you after spending it.


Unfortunately, Bitcoin has one or two flaws the governments are trying to exploit to gain some control. And whether governments are going to be successful in exploiting these flaws remain to be seen. Luckily, there are several other digital currencies making waves, and they aim to avoid the same pitfalls.


Regardless of how popular digital currencies are and their growth in value, you should always be careful before making any investments. Just like the stock market, the value of Bitcoin, or any other digital currency for that matter, is vulnerable and can drop at any moment. It remains an unpredictable space you want to understand better before taking any risks.


Bitcoin Explained

invest in bitcoin

Investing In Bitcoin

Bitcoin is a digital currency created and held electronically. It was created in 2009 and became the first decentralized digital currency. Its creation is attributed to an unknown software developer or developers going by the name Satoshi Nakamoto. Bitcoin operates on blockchain technology that acts as a public ledger that holds permanent records of all transactions.


invest in bitcoin

How to Use Bitcoin

Bitcoin is used for making electronic purchases just like Dollars, Pounds, or Euros but only a handful of merchants accept payments in bitcoin. Accessing bitcoin is another potential hurdle since the process is not very consumer friendly. Traditionally, you had to go to a cryptocurrency exchange to buy bitcoin and transfer it to your bitcoin wallet but things are now changing. Today, new services such as bitcoin debit cards and ATMs are now available to ease the process.

Investing in Bitcoin

It can be a good idea to invest in bitcoin since it presents so many benefits. Bitcoin has been outperforming traditional stocks and is currently worth more than an ounce of gold at the time of this writing. Here are a few more reasons why you should consider investing in bitcoin:


Today, people have an unprecedented level of distrust in the current financial setup. In the wake of the 2008/2009 global recession, the resentment towards banking institutions by both private and public institutions is growing. People are thus warming up to the idea of using different mediums of exchange such as bitcoin.

Deflationary Model

The bitcoins that can ever be mined are limited, which means that the problems of inflation associated with traditional currencies don’t affect bitcoin. In theory, the price of a bitcoin would grow infinitely in a completely free market where each coin would potentially be worth hundreds of millions of dollars. However, this would involve a significant acceptance of the currency globally as well as other factors coming into play, but on paper the value of each coin should rise as trade continues to rise.

How Can You Invest in Bitcoin?

Buy and Hold

One of the easiest ways to invest in bitcoin is to buy some and wait for their value to rise. This approach has already made a sizeable number of people quite wealthy. The people that bought Bitcoin early on have enjoyed significant increases on their investments. Originally, Bitcoin sold for a few dollars and now it is worth about $3,000 at the time of this writing.

Mining Investment

Transactions on the blockchain are verified by a distributed network of powerful computers. If you contribute your computing power to this distributed network, some of the freshly minted coins will be apportioned to you as an incentive and reward for transaction processing. The network adjusts as more computing power is added to it which means that a constant number of bitcoins are generated relative to the increase in computing power. The process described here is known as mining and is one of the ways you can invest in bitcoin.

Investing in Companies

If you prefer the traditional approach to investment you can invest in one of the many emerging bitcoin startups. Bitcoin creates new approaches to online transactions and increases the efficiency of old models, which usually brings profit. If you invest in a company innovating in this industry, you will benefit from the technology without the need to speculate on the commodity (bitcoin).

The Bottom Line

Bitcoin is an excellent investment vehicle even for those that are risk averse. The important thing is to invest in only what you can afford to lose since it is highly volatile. You should also educate yourself about the risks, advantages, and disadvantages of using different bitcoin storage methods.