While everyone has heard of crypto names like Bitcoin, not everyone understands the fundamentals of how cryptocurrencies actually work — especially in the context of personal finance. Here’s what you need to know about this revolutionary technology:
What is digital currency?
Cryptocurrency is digital cash for the digital age. It’s similar to regular money — think ££, $$ or €€ — but it’s digital only, so there are no bills or coins to carry around. It is basically a digital way to hold and transfer value online. You can purchase cryptocurrency tokens or coins online, and there is typically no one person or bank that controls a particular cryptocurrency. There are dozens of different cryptocurrencies available online, the biggest and most well-known ones being Bitcoin or Ethereum.
When was it first introduced?
The idea of having a digital currency has been coined by a lot of intellectuals for the past few years. Prior to cryptocurrencies, many attempts at creating one have taken place. However, the main issue most of them have faced was the double spending problem, as digital assets needs to be usable only once to prevent counterfeit.
Over 10 years before cryptocurrencies, the concept had been introduced by computer engineer Wei Dai. In 1998, he published a paper where he discussed “B-money”. He discussed the idea of a digital currency, which could be sent along a group of untraceable digital pseudonyms. That same year, another attempt by the name of Bit Gold was drafted by blockchain pioneer Nick Szabo. Bit Gold equally looked into creating a decentralized digital currency. Szabo’s idea was spurred by inefficiencies within the traditional financial system, such as requiring metal to create coins and to reduce the amount of trust needed to create transactions. While both were never officially launched, they were part of the inspiration behind the now infamous cryptocurrency.
What can it be used for?
The most well-known benefit of cryptocurrencies is its ability to send and receive payments at a low cost, while maintaining a high speed. Millions worth of transaction can take only two and a half minutes to process and cost the sender a cent in transaction fees. If this amount of money transfer had gone through a financial intermediary the fees would have been much, much higher and the transfer would have taken several days, or longer if this was a cross-border transaction.
The low fees associated with transactions using digital currencies such as the ALA coin make them excellent payment systems for international money transfers.
Future of digital money
The emergence of digital money has sparked a debate about its future and that of other cryptocurrencies. Despite Bitcoin’s recent issues, its success since its 2009 launch has inspired the creation of alternative cryptocurrencies such as Litecoin, Ripple and ALA.
How far along digital money in becoming more popular than traditional money is yet to be determined; however, if it can sustain its market presence, cryptocurrency could be highly valued in the very near future.