Something can be somewhat difficult to grasp for those new to Bitcoin and other cryptocurrencies is that they are virtual and offer an entirely digital means of exchanging money. And, because these currencies are not regulated by governments in the same way that fiat currencies are, they are considered to be ‘alternatives’ that are not as widely implemented as people tend to be unsure of how they can be used outside of regular monetary policies that exist with other currency types.
Bitcoin at the moment is more widely used in the realm of online casinos and gambling (making up a significant portion of the global gambling market) as it allows a seamless exchange of money in a way that is discreet and almost instantaneous, making it an easy way of exchanging the currency for gaming credits, for example. This is somewhat of a different picture when it comes to shoppers looking to purchase other items or services as the transfer of Bitcoin involves incurring a transaction fee, which is not the optimum solution for everyone.
With Bitcoin and other digital currencies experiencing rapid growth these days and more and more cryptocurrencies being introduced every month, it is seemingly becoming ever more important that we find out everything we can about Bitcoin in order to be prepared for its slow but steady integration into our every spending habits (if current spending trends persist). So, what are the components that make a cryptocurrency and how do they feature in the making us more informed as Bitcoin users of the future?
The block chain of a cryptocurrency is essentially a method of recording data and acts as a digital leger that keeps track of all contracts, agreements and transactions that take place. As the block chain keeps track of the entire history of a cryptocurrency’s transactions, it increases in length over time and is finite. A transaction that it completed by via cryptocurrency is not considered to be final until it is added to the block chain and this is normally completed within minutes. It is also important that while transactions go through far quicker with cryptocurrencies than they typically would with a fiat currency transaction (there are fewer steps involved along the way), there is no way to reverse a payment once it has been made.
Private keys are given to every cryptocurrency holder to allow them to be able to authenticate their identity and this is what allows them to exchange units. Users can also create their own private jets which can be generated via a random number generator or as a personal choice as long as they are formatted as a whole number that is between 1 and 78 digits in length. Only the key holder should then be able to spend the currency and without it, the holdings within a wallet are essentially useless. Losing a key is said to be the same as throwing your money away as while you can create a new one, you will not be able to recover what you held under your original key.
Another component of cryptocurrencies is that users are required to have their own wallets that include unique and highly user specific information that confirms their ownership of the wallet and their cryptocurrency unit ownership. As we mentioned previously, private keys assist in the authentication process of a cryptocurrency transition, wallets work in a way that reduced the amount of risk there is of the units within the wallet to be stolen. Something that has come under criticism is the fact that the cryptocurrencies are very much exposed to the possibility of hacking. This fear was very much confirmed when Mt. Gox, the world’s largest Bitcoin exchange, fell into bankruptcy in 2014 when the equivalent of $460 million Bitcoins was taken from its servers. It is for this reason that some users have been skeptical about the wider use of Bitcoin as it means that wallets need to be duplicated and backed up to offer maximum safety.
Miners are important to the life cycle of the Bitcoin as they act as the indirect influencers on the cryptocurrencies’ value and work as record keepers for cryptocurrency communities. Miners use huge amounts of computer power and technical skill to check the security, accuracy and completeness of currencies like the Bitcoin’s block chains. This leads into the significance of traceability when it comes to cryptocurrencies as miners work in such a way that they create new copies of the block chain which allows them to add recent and past unverified transaction to a previous block chain copy which allows for the effective completion of a transaction.
Bitcoin and other cryptocurrencies are mined over time to produce new units of the currency and release this into circulation which ultimately means that miners receive new units per each individual block chain as time passes. At the present moment it is estimated that 77.53% of the 21 million Bitcoins that are available for mining have been mined. It is predicted that Bitcoin will be fully mined by the middle of the 22nd century if we are following the trend for mining in its current form. An easy way to put finite supply currencies such as Bitcoin into perspective is to compare them to precious metals such as gold, for example of which a limited number exists, in comparison to fiat currencies where the supply is theoretically unlimited.
Currencies that are less well known can only currently be transferred through private means that are not as active as and harder to value than other currency forms. Currencies that are more popular, such as the Ripple or Bitcoin are traded via particular special secondary exchanges that are similar to those used by fiat currencies. These essentially allow people to exchange their fiat currencies into cryptocurrency and vice versa. This service is not free however and the platforms take a small cut of the transaction price, which normally stands at less than 1%, for example. If you are looking to exchange your fiat currency into crypto, there is still an area of discrepancy surrounding the exchange pricing and the volatility of the market.
You may tend to find that cryptocurrencies are very much treated like Marmite when it comes to the opinions they accumulate from the public. Some consider them to be useless whereas others fundamentally agree that they have the power to alter the face of global finance for the better. While we are still considered to be in the very early stages of its development and understanding its true role in our economy, it is important to be mindful of the limitations of the practicalities of cryptocurrencies on the whole.