22 November 2017

Cryptocurrencies and Bitcoin: What you need to know

We've experienced the advent of many new technologies in the past decade, but perhaps none has been as controversial (or confounding) as cryptocurrencies.

Bitcoin, the first digital currency, debuted in 2009 to both fanfare and scepticism. Some people believed it represented the currency of the future. Others saw it as a way for black market sellers to circumvent the law or as a scam that could rob investors of their money.

Nearly 10 years on and Bitcoin is still inspiring hope, criticism, and much heated debate. Bitcoin's defenders — and cryptocurrency enthusiasts more broadly — insist the world is moving toward a more decentralised, digital financial system.

What are cryptocurrencies?

Cryptocurrencies are digital payment systems not backed or guaranteed by a government or central bank. The lack of a middle-man allows for lower transaction fees and faster transaction rates, which are core to a digital currency's appeal. 

Because of their decentralised nature, cryptocurrency users can transfer and exchange money and pay for goods and services without going through formal banks. Some enjoy the fast, cost-effective nature of the arrangement; some value the at least partial anonymity; and some have taken advantage of the obvious black market benefits of operating outside the confines of state regulations.

Bitcoin, Ethereum, and other cryptocurrencies run on blockchain technology, a distributed ledger that relies on encryption algorithms to verify, record, and save data. Blockchain is widely considered to be more secure than traditional data security systems, increasing the benefits of cryptocurrencies.

An uncertain future

Despite ongoing debates about its long-term viability, Bitcoin in particular has worked its way into the mainstream. In fact, The Collective, a London-based co-living space, announced recently that it would accept Bitcoin payments from tenants.

Still, Bitcoin's staying power often appears tenuous. In addition to dramatic pricing swings, it often faces deep scrutiny and strained responses from governments. The Chinese government effectively forced Bitcoin exchanges in the country to shut down in October after banning initial coin offerings.

Here in the UK, the attitude is warmer, but not across the board. The British government reportedly mulled using Bitcoin, or at least some form of blockchain technology, to distribute state grant money and track how taxpayer money is spent.

A safe bet or a risky gamble?

Perhaps it's unsurprising that Bitcoin, and cryptocurrencies in general, are still uncertain investments. After all, Bitcoin only came on the scene in 2009.

In less than a decade, its prices have hit incredible highs, turned investors into millionaires, and driven numerous tech innovations. Its digital, deregulated nature makes it a different beast from other currencies and investment options, so some uncertainty is to be expected.

Ultimately, the decision is a personal one. As the popular personal finance site The Motley Fool cautions, "nothing should be invested in bitcoin currency that an investor isn't comfortable losing."

If you're comfortable with risk and speculation, you may enjoy being along for Bitcoin's wild ride. But if price swings and government backlashes are going to keep you up at night, perhaps you'll want to sit this one out.

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About the author

Casey Hynes

Casey Hynes is a freelance journalist writing about fintech, AI, economic development and personal finance. She's written for the Wall Street Journal and the Washington Post.

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