Understanding Bitcoin and other cryptocurrencies
You cannot pay your taxes with it, buy products at major retailers or pay for your hotel room with it. Still, Bitcoin — and other cryptocurrencies such as Litecoin, Ethereum, Dash and Ripple — are
considered by many financial experts to be at the forefront of a monetary revolution.
Investors are making and losing big sums of money on these volatile currencies, whose values ascend and plummet dramatically from month-to-month and even week-to-week. Criminals have used cryptocurrencies to keep private their financial transactions. Even the leader of Russia, Vladimir Putin, has suggested his country is considering creating its own cryptocurrency to circumvent U.S. and European sanctions that have been enacted against Russia.
Some argue the beauty and power of cryptocurrencies is they are both easily transferrable, person-to-person, and that those transactions are anonymous. Others argue they are currencies that aid and abet outlaw activities. How? The identities of those who possess cryptocurrencies are hidden through the use of a “private key” that is a long chain of numbers and letters. Some consider those private keys to be un-hackable.
But let’s back up a moment. The whole cryptocurrency realm is confusing to most people. Keep this in mind, say fiscal experts: Money is simply an accounting system, a way of keeping a record of who owns (and owes) what and to whom. Enter Bitcoin, a digital, Internet-based accounting system that records transactions and the value exchanged. By monitoring and updating a cryptocurrency’s ledger, one can remove the middleman and eliminating or greatly reducing the fees and inefficiencies imposed by banks and other financial service providers. Consider that when remittances are sent to assist family members and friends in other countries, a simple $100 transaction can cost as much as $5 to $10 in fees.
“It’s kind of remarkable that this idea of Bitcoin was launched just a few weeks after Lehman Brothers went bankrupt and the whole financial system nearly collapsed,” says New York Times’ reporter Nathaniel Popper. “I think what the crisis showed is that the existing system had some major flaws. It wasn’t working and people were hungry for some sort of alternative.”
It is blockchain technology that records each and every cryptocurrency exchange. Transactions are recorded in the blockchain as a permanent record that cannot be altered or hacked. (That is an especially important point when one remembers that J.P. Morgan, Home Depot, Target and many other companies have had their client data hacked and stolen by cyber criminals. By contrast, a cryptocurrency ledger resides on thousands of computers rather than a single location.) At least that is the argument made by blockchain advocates. Blockchain “wallets” are encrypted, so the identity of those doing the spending is kept secret.
Of course, there is much more that could be explained. Suffice it to say the world has entered a brave new world of finance. Whether cryptocurrency will truly stand the test of time and become a more exchangeable form of money remains to be seen. But the technology is in play and we are watching it with great interest.
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