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.
