Cryptocurrency is a digital medium of exchange that uses cryptography, hence ‘crypto’, for security. Bitcoin, Namecoin, Litecoin and Dogecoin are just a few of the most popular cryptocurrencies on the market. The well-known Bitcoin is the most prevalent cryptocurrency in terms of market capitalisation with one Bitcoin being worth £346, depending on the exchange rate.

The military grade of cryptography being used by Bitcoin makes it impossible to know the identity of those making payments. When transferring Bitcoins, transactions are verified with an electronic signature known as a public-encryption key and steps can be taken to ensure further privacy, allowing greater freedom of use.

Bitcoin’s origins are somewhat of a mystery but it was created around 2009. Today, it is managed by a small group of developers with the alleged Bitcoin founder, Dorian Nakamoto, categorically denying being the creator. Bitcoin themselves call it ‘a new kind of money’. The peer-to-peer technology used to facilitate instant payments allows worldwide transferability with no central authority. With no need to go through a bank or authorities, fees are reduced, accounts cannot be frozen and there are no perquisites or limits. Obviously monetary authorities don’t like it; Goldman Sachs claims Bitcoin is not a currency. Yet small businesses and freelancers can set up Bitcoin payments for free which could change the way online and small businesses work.

With no need to go through a bank or authorities, fees are reduced, accounts cannot be frozen and there are no perquisites or limits.

Bitcoins are generated across the Internet and harnessed by anyone using an open-source, free application called a miner. Mining is a term that refers to the way cryptocurrencies are earned, meaning that computers are used to solve complex mathematical problems to earn a coin. Bitcoins are created at a predictable and limited rate. This is a smart way to issue the currency as it creates a good incentive for more people to start mining. The amount of work a computer has to do to earn a coin is automatically adjusted by the network. The network tracks the number of coins being mined via the mining software used. With paper money, a centralised government decides when to print more and this can be limitless. The total number of Bitcoins that will be issued is capped at 21 million to ensure they are not devalued by a limitless supply.

Imagine a lump of coal with a golden coin in the middle. Your computer slowly chips away at the coal by solving the mathematical problems one by one. Depending on how hard the number crunching is, your computer will eventually chip away and solve all of the problems in order to earn the coin in the middle.

The popularity of cryptocurrencies has changed the way people think about the economy.

But, is it worth it? Nobel Prize-winning economist Paul Krugman wrote: “Gold, after all, has at least some real uses, but now we’re burning up resources to create ‘virtual gold’ that consists of nothing but strings of digits.”

People can mine coins in their bedrooms but this way is unappealing; the electricity cost for working computer processors hard is far more than the value gained. To make it more cost efficient, miners pool together finding solutions faster with each miner being rewarded proportionately to the amount of work they have provided. An extreme option is to set-up rooms full of graphics cards and ASIC chips. ASIC are application-specific integrated circuit chips that are designed specifically for Bitcoin mining, making it even faster without as much electricity.

You can already use Bitcoins to buy games, gifts and pretty much anything online. Bitcoins can be exchanged for real money but that’s not what it’s all about – not yet anyway. The popularity of cryptocurrencies has changed the way people think about the economy. This ‘virtual gold’ only exists in the technology, without that, it has no other worth. Ultimately, Bitcoin software is still developing; if more people become aware of cryptocurrencies, the more they mine and the more they use them, the greater potential influence this market has. Who knows, one day it could take over the world.



Paula Clerkin

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