What is bitcoin? Its capabilities
Investors and journalists compare today's fashion for investing in cryptocurrencies (such as bitcoin) to the American gold rush of the mid-19th century. Others compare the mania for digital currency to the Dutch fascination with tulips in the 18th century.
Time will tell how long bitcoin and similar digital currencies will last, and whether they will become the new gold standard or fade into oblivion like the tulip craze in Holland.
Digital currencies, or cryptocurrencies, are electronic monetary units generated by computer networks that are used in place of traditional currencies.
Paying with digital currency is not the same as paying with a credit or debit card, PayPal or ApplePay-all these payment systems address traditional currencies such as U.S. dollars, British pounds and Chinese yuan.
A unit of digital currency has a value that is determined by exchanging traditional currencies and commodities for units of digital currency on special currency exchanges on the Internet, such as BitPay. The operation of these exchanges is somewhat similar to PayPal, but is in no way related to that company.
The value of traditional currencies, commodities and gold is determined based on national and international banking standards.
1. Zero or very low commissions
2. instant transfers
3. Safety, reliability, security
4. Technological advantage
5. Ability to send microtransactions
6. Open technology
7. Ability to use in gaming (crash games)
Generating digital currency
Cryptocurrency is generated by a distributed network of computers connected to a closed Internet community; the computers execute a set of complex cryptographic algorithms, resulting in cryptocurrency in the form of digital currency units. They can only be paid for within digital communities; individuals and organizations can open accounts (called wallets) in specialized communities.
Community founders limit the number of units of money that can be generated by the computers that support transactions in the community. The collective effort to create currency for a community is called Initial Coin Offering.
Bitcoin is the most popular cryptocurrency, and yet it is one of the first cryptocurrencies to have an initial issue limit.
The man known under the pseudonym Satoshi Nakamoto organized this cryptocurrency and founded the technology of its generation and management, in 2008, Nakamoto set the maximum number of bitcoins generated by a distributed network of computers at 21 million. This bitcoin supply limitation ensures demand for the unit of currency, which consequently increases in value.
Since 2010, there have been about a dozen hacks of cryptocurrency exchanges. The losses are in the hundreds of millions of dollars.
On the other hand, traditional banks and financial institutions have lost billions of dollars to cybercriminals during the same time.
Programmers and members of the cryptocurrency community are working hard to identify and fix vulnerabilities in their respective blockchain networks.
If blockchain becomes an acceptable currency for traditional merchants, sophisticated computer algorithms could take over some of the functions of the world's central banks.
As for personal security, every user investing in bitcoin is advised to install a security class solution to protect against Internet threats before accessing financial information and conducting transactions.