Wall Street giant Goldman Sachs is reportedly evaluating Bitcoin as an investment option for its clients. If it indeed happens, it will be a watershed moment in the cryptocurrency domain, which has given massive returns to investors. But before you jump in and start trading Bitcoins immediately, here are a few fundamental things you should know about Bitcoin and cryptocurrencies.
Digital currencies such as Bitcoin can be thought of as an electronic medium of payment. Because it uses techniques of cryptography for its security, a cryptocurrency is considered relatively secure and it can not be counterfeited, which is a problem with paper currency. An important point to note is that Bitcoin or any other digital currency is decentralized. It is not issued by the government or the central bank, but regulated and maintained by a network of computers who have agreed on the different rules and aspects of the Bitcoin protocol. Since this network is spread across the world, no government can theoretically regulate or control the digital currencies.
However, just as your email accounts are susceptible to hacking and illegal use, Bitcoins can also be stolen if your digital wallet (where you store your bitcoins) is hacked.
A bitcoin is said to be “mined” once transactions are assembled in a “block” and they are added to the public “ledger” (which records all completed bitcoin transactions). This addition of completed transactions in the ledger creates what is known as a “Blockchain.” Since a huge amount of computing power is required to solve these problems in addition to the cost of electricity and cooling the processors, the Bitcoin “miner” who would dedicate this computing power will be assigned a certain number of Bitcoins as a reward for this work, apart from the transaction fees of compiling the transactions in the block. This process is called “Bitcoin mining.”
But why would anyone do this? To get the rewards in the form of Bitcoins. But what is the value of these Bitcoins? Well, the implicit value of these bitcoins is determined by the demand and supply of bitcoins. And as more and more people across the world start accepting Bitcoins to pay and receive for buying a product, the value of Bitcoin will keep increasing. The lure of using a digital currency over traditional paper currency is in its enhanced security. As more countries accept the use of Bitcoin as a legal currency, its value is set to increase.
Since Bitcoin is not centrally regulated by any agency, the successful working of the currency depends on the individuals deciding the protocols and operational mechanism of the currency and who also maintain the technology behind Bitcoin. Thus, even as Bitcoin has given juicy rewards since its inception, it has inherent risks in its decentralized operations and susceptibility to digital theft that should be understood before putting your dollars into Bitcoin.