There is no question that the very subject of digital currencies divides opinion. Some consider that virtual currencies such as Bitcoin, which has garnered the most publicity and uptake, are the way of the future, while others can only view them with a mixture of fear and confusion.
Digital currencies are also referred to as cryptocurrencies and they are one of the same thing. A cryptocurrency is a digital currency which utilizes sophisticated encryption techniques in order to regulate and maintain control of the generation of units of currency, in the same way that the physical process of printing paper money is carried out in a highly regulated and controlled environment where security is paramount.
One of the fundamental points about a digital currency that is important to remember, is the fact that digital currencies such as Bitcoin are currently operating independently of a central bank facility, which does potentially create an outlet to generate personal wealth that could be difficult to restrict or confiscate in the normal way, by the relevant authorities such as the IRS or other government bodies.
The level of anonymity surrounding digital currencies such as Bitcoin and other subsequent cryptocurrencies that have later emerged, like Litecoin, Namecoin and PPCoin, have created a level of suspicion amongst some detractors, that this method of currency is well-suited to unsavory activities such as money laundering and tax evasion.
There is no doubt that this potential for anonymity and the prospect of criminal activities is clouding the genuine promise that digital currency platforms provide, in being able to deliver a widely accepted means of payment, once it becomes transferable in an acceptable and regulated way, outside of its own platform.
Digital currencies already in use
We already live in a world of online commerce and the worldwide acceptance of digital currencies like Bitcoin is not that much of a technological leap from what we already have in place at the moment.
The value of these digital currencies can be monitored using a resource like CoinTracking, where you can view prices and check current and historical prices for some 3309 existing currencies.
You can already acquire Facebook Credits or Amazon Coins for example. These allow you to purchase real or virtual goods within their platform as an alternative to paying with “real” money. The current banking system also operates in a digital way, transferring sums of money between accounts without any physical exchange of cash taking place, so we already have a similar understanding and acceptance of the concept.
Why Bitcoin is different
As Bitcoin is the most high-profile digital currency at the present time, it is worth taking a look at what makes Bitcoin different to platform-based digital currencies.
In a nutshell, Bitcoin is a digital currency without a central issuer.
What this means is that Bitcoin is a completely autonomous and decentralized currency that exists and operates without a centralized operating system. Using bespoke open-source software, a specified amount of Bitcoins is provided to users in exchange for specific contributions to the operation of the Bitcoin system itself.
This means that Bitcoin users have the ability to transfer the digital currency amongst themselves and use them to purchase goods and services. It also opens up the possibility of using Bitcoin for buying and selling national currencies through a variety of unofficially recognized internet-based exchanges.
Due to the fact that Bitcoins are purely a digital creation and there is no physical cash or central institution controlling their use, there is considered to be a genuine risk that some users may attempt to duplicate or counterfeit them.
These concerns are addressed by the sophisticated encryption techniques deployed to protect the integrity of the Bitcoin system. There is also a finite amount of coins that can be supplied, although it is estimated that this current level will not be reached until around 2140.
One of the ways that Bitcoin seeks to address the issue of criminal activity such as tax evasion or money laundering, is to create a high level of transparency within the Bitcoin system.
Every single Bitcoin transaction is stored in a massive general ledger within the network, known as the blockchain.
The blockchain is designed to be the master of all it surveys and if you have a publicly used Bitcoin address, anyone can access that information and reveal how many Bitcoins are currently stored at that specified address, but they can correlate that data with your personal details.
It should be noted that there are some potential ways to mask the extent of your activities within the Bitcoin network, by not using the same Bitcoin address all of the time and avoiding a substantial transfer of Bitcoins to a single address.
Fast and cheap
Another selling point for a digital currency like Bitcoin is that the cost of using the system is often much cheaper than conventional banking charges and transfer costs.
Your bank will almost certainly charge you a transaction fee for making international transfers and that can vary quite considerably, but making a Bitcoin transfer won’t attract a fee.
Bank transfers can be made the same day if your account is set up to do this. Bitcoin promises to be quicker than any bank transfer facility. A Bitcoin transaction often takes just a few minutes to complete, transferring a Bitcoin payment as quickly as it takes the system to process the payment.
The basic selling points of a digital currency like Bitcoin, is that it is fast and cheap to use, offers privacy, and operates without central government intervention.
Should you buy into Bitcoin?
Interest and credibility for Bitcoin is steadily rising and the digital currency’s value has been a bit of a rollercoaster ride, which is understandable when you consider how sentiment and opinion has shifted as people get to grips with the role that it has to play in the future of payment systems and currencies in general.
Some heavyweight Wall Street firms have invested in excess of $300 million during 2015 in Bitcoin and the blockchain technology behind the currency. The basic principle that seems to fuel the investment in Bitcoin is the technological capabilities it offers as a form of digital cash, allowing cheap, secure and instantaneous transfers anywhere in the world.
The question of whether you choose to invest in Bitcoins should probably revolve around one central issue. If Bitcoins are adopted for a number of practical applications and the platform itself and the protocol it offers become more ingrained in our mainstream banking rituals, its value will rise significantly.
The question is whether you believe that scenario will be allowed to happen and when it could occur.