Cryptocurrency: Bitcoin and Altcoins

 

What is a ‘Cryptocurrency’?

A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.

Breaking Down ‘Cryptocurrency’

The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009 by an individual or group known under the pseudonym Satoshi Nakamoto. As of September 2015, there were over 14.6 million bitcoins in circulation with a total market value of $3.4 billion. Bitcoin’s success has spawned a number of competing cryptocurrencies, such as Litecoin, Namecoin and PPCoin.

Cryptocurrency Benefits and Drawbacks

Cryptocurrencies make it easier to transfer funds between two parties in a transaction; these transfers are facilitated through the use of public and private keys for security purposes. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.

Central to the genius of Bitcoin is the block chain it uses to store an online ledger of all the transactions that have ever been conducted using bitcoins, providing a data structure for this ledger that is exposed to a limited threat from hackers and can be copied across all computers running Bitcoin software. Many experts see this block chain as having important uses in technologies, such as online voting and crowdfunding, and major financial institutions such as JP Morgan Chase see potential in cryptocurrencies to lower transaction costs by making payment processing more efficient.

However, because cryptocurrencies are virtual and do not have a central repository, a digital cryptocurrency balance can be wiped out by a computer crash if a backup copy of the holdings does not exist. Since prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely.

Cryptocurrencies are not immune to the threat of hacking. In Bitcoin’s short history to 2015, the company has been subject to over 40 thefts, including a few that exceeded $1 million in value. Still, many observers look at cryptocurrencies as hope that a currency can exist that preserves value, facilitates exchange, is more transportable than hard metals, and is outside the influence of central banks and governments.

The anonymous nature of cryptocurrency transactions makes them well-suited for a host of nefarious activities, such as money laundering and tax evasion.

Bitcoin

“Even if they do not accurately understand how it works, most people are at least somewhat familiar with Bitcoin.  However, once they begin to get involved with cryptocurrency, they may be surprised to learn that there are actually hundreds of types of cryptocurrencies known as altcoins. Altcoins are an intriguing facet of the cryptocurrency landscape, but they are not for everyone.”

What Are Altcoins and Why Do They Matter?

The word “altcoin” is an abbreviation of “Bitcoin alternative,” and thus describes every single cryptocurrency except for Bitcoin. Altcoins are referred to as Bitcoin alternatives because, at least to some extent, most altcoins hope to either replace or improve upon at least one Bitcoin component.

“Many Bitcoin enthusiasts argue that altcoins are completely unnecessary and will not succeed because they cannot rival the infrastructure Bitcoin boasts. However, altcoins serve an important role. Decentralization is one of Bitcoin’s most prominent goals, and altcoins further decentralize the cryptocurrency community. Moreover, altcoins allow developers to experiment with unique features. While it is true that Bitcoin can copy these features if the developers or community desires, fully-functioning altcoins are much better “cryptocurrency laboratories” than Bitcoin’s testnet. Finally, Altcoins give Bitcoin healthy competition. Altcoins give cryptocurrency users alternative options and forces Bitcoin’s developers to remain active and continue innovating. If users do not feel that Bitcoin satisfies their digital desires, they can adopt an altcoin. If enough users left Bitcoin for a particular altcoin, the Bitcoin developers would have to adopt the features the community desired or risk losing its place as the preeminent cryptocurrency.”

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In 2015, it was said that “Bitcoins and other cryptocurriencies are a passing fad and like pet rocks they will find their resting place in the museum of curious inventions.  Block chains on the other hand may find a use.”

Now in 2017, Bitcoin seems stronger than ever, and definitely if one looks at the overall picture of Bitcoin, the price although it varies, overall it is steadily rising since it’s inception in 2009 as the following Coindesk chart clearly shows.

 

 

While Bitcoin’s record shows volatility in it’s price, the overall price continues to go up and up and up.  It is anyone’s guess whether prices will ever drop considerably.   However, if one monitors Bitcoin’s prices, there will be buying opportunities.   It is just a matter of time.

Should Bitcoin be a part of your investment portfolio?  There is risk associated with purchasing Bitcoin to hold as an investment.  However, in a well diversified investment portfolio, it is this writer’s opinion that Bitcoin should be included, especially when the plan is to buy and hold.

 

Judy Curtis,
Contributor

 

 

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