As bitcoin reaches for $2,500 again, I thought this would be a good time to let my readers know exactly how digital currencies work and how to get more information if you wish to partake in this alternative investment.
It’s called a decentralized digital currency because it is stored electronically, there are no “coins” to put in your pocket and no one controls its value except the marketplace. The images of gold coins used by media to represent bitcoin are not real and do not exist.
Bitcoins are “mined” or searched for by using computing processing power in a distributed network to locate and solve mathematical problems to acquire the code for the “coin”. It’s not something you or I will be doing so let’s move on.
However this distributed network also provides the backbone to use bitcoin to purchase items or identify the bitcoin you hold.
Bitcoin and other alt coins are called cryptocurrencies not because they are so secretive or used by spies, but because the are based on blockchain technology, which uses robust encryption to secure the identity of that coin.
The blockchain or code behind bitcoin is the innovative technology that allows digital currencies to exist.
But enough about the back-end of bitcoin, to start out acquiring a digital currency you need to have a digital wallet.The wallet can be thought of more like a bank account, which can reside on your computer, phone or other smart device. It is always advisable to have your wallet backed up in another location so that a crashed hard drive does not wipe out your bitcoins.
There are many wallets out there to choose from depending on your security needs and whether you wish to be an active trader or a more passive buy and hold investor.
I say investor, because the majority of people holding digital currencies are doing just that. One year ago bitcoin was trading at $525, it is now nearing $2,500 so at this point it does not make sense to purchase items using bitcoin.
Now like any other investment, there’s no guarantee that bitcoins will continue this rapid rise, but there are some aspect of bitcoins that point in that direction.
The bitcoin protocol, which governors how bitcoin works will only create 21 million bitcoins.As of earlier this year 16.8 million or 80 percent of all the bitcoins to be created have been mined. So unlike the paper currencies in the world today, no governing body can print more bitcoin to dilute its value.
A second bullish marker for bitcoins is that a vast majority of the planet does not know of or is involved in digital currencies, so as this news moves into the mainstream more investors may wish to jump in.
There are some very outlandish predictions for bitcoins value in the next three years as the scarcity and growing numbers of investors become aware, but like I said no investment chart goes straight up.
As the value rises a very important aspect to bitcoins is it can be divided into smaller parts. The smallest divisible amount is one hundred millionth of a bitcoin and is called a ‘Satoshi’, after the founder of bitcoin, the software developer called Satoshi Nakamoto.
Remember this is just a primer and there are many resources out there to study up on this new form currency. I wanted to give the readers some guideposts to study and to get familiar with the protocol and tools needed to tap into this new technology.