With the widespread use of the internet and increased globalization, more and more of our financial transactions are being done online. Digital money, which is simply a representation of real money in electronic form makes payments to be done easily and in a more convenient manner. There is also less risk involved as online payments are done through the most secure channels available, thus rendering them less prone to theft and fraud than physical money. Not to mention, the conservation of paper and storage space with the growing prevalence of digital money. These benefits have made digital money and payments ubiquitous in the developed world and are being adopted at a rapid rate in developing countries as a result of increased internet penetration in newer places.
Most of the money owned by us and used daily are what is known as fiat money. Fiat currencies simply refer to any currency that is backed by the government of a nation, rather than being backed by any commodity such as gold or other metals. All this means the central government and the banking system of the nation have greater power in exercising control of the currency and can easily control the flow and use of the money.
Meaning the money you hold is simply worth as much because the government declared it so and they could any day make a new rule imposing restrictions or changing the way the financial services are procured. Digital money, which is a representation of fiat money, is subject to the same rules and regulations. A lot of people also did not like the various fees and taxation imposed on any financial transaction of fiat currencies. With a growing caution came about a movement calling for more ownership and control by the common person on the money they owned. This sentiment paved the way for the slow and firm adoption of a completely new type of money called the cryptocurrency.
All the doubts and uncertainty of the government-backed currencies led to the creation of the first type of cryptocurrency called bitcoin. A cryptocurrency is a digital asset that is used purely online and is secured by cryptography. They do not exist in physical space. A type of organizational method called the blockchain is used to keep track of transactional data and ownership of the coin. It ensures the integrity and validity of all transactions going through the currency network. Bitcoin is one such currency and was the first cryptocurrency to exist as well as being the most valuable and popular one right now.
Bitcoin, like every other cryptocurrency, is created through a process called mining. Mining involves solving complex mathematical functions to create a bitcoin, that is then released to a common pool of the currency. The blockchain is very secure and transactions on it are public ensuring transparency. The parties doing the transactions themselves are anonymous, represented in transactions only by their wallet address which is a long series of numerical and alphabetic characters. Thus bitcoin provides security, transparency, and anonymity at the same time proving to be an attractive form of payment.
Since bitcoin exists outside of the purview of banks or governments, its control is decentralized and not influenced by a single entity like in the case of fiat currency. This allows for greater anonymity as well as lower fees when making bitcoin transactions. Bitcoins are stored in a digital wallet with unique addresses which are kept very secure either online or offline. Existing outside the traditional financial system also makes them resistant to inflation offering a great potential investment since the increased adoption of bitcoin worldwide is increasing its worth.
Since its inception in 2009, bitcoin has grown exponentially providing extremely profitable returns for early adopters. In late 2020, it reached an all-time high of around $40,000 garnering mass media attention and further proving it to be a valid form of an alternate payment system. Because of the popularity of bitcoin, soon after its creation other forms of coins known as “altcoins” had emerged. Some of them are dogecoin, litecoin, and ethereum. Nowadays, there are well over thousands of different altcoins but bitcoin remains the most widely known and valued.
It has not all been merry on this meteoric rise of bitcoin. Because of its anonymity, it has often been commonly used in illegal activities and is subject to a high market price volatility. So far, the positives have far outweighed the negatives of this type of new currency but how it will develop further remains to be seen. The general sentiment from experts seems to be very optimistic and bitcoin is continuing to show a promising future.