Digital currency has existed for many years now. It has only recently reached mainstream public knowledge, though, so plenty of people are wondering how it came to be and where it will go.
For an idea of how quickly things have changed, consider this: In its infancy, one bitcoin was worth as little as $2. At publication, the value of a single bitcoin rests at just over $5,400.
The networks and technologies that make digital currency possible are complex and sometimes too complicated to understand on the surface. Let’s take a look at the history of digital currency and make it easier to understand.
They’re Not Even A Decade Old
Digital currencies really began with the invention and release of bitcoin in 2009. Instead of relying on the age-old currency structure with centralized printing and regulations, this new medium would make use of encrypted data to control its creation and management.
A “Satoshi Nakamoto” is credited with this invention, but there is much speculation as to this person’s real identity to this day. This name is as common in Japanese as, say, John Smith. No individual or group has come forward to reveal themselves as the creator of bitcoin, and there’s even speculation that “Satoshi Nakamoto” is simply the name of a computer network.
Digital cash technologies existed before the release of bitcoin, but none took off so quickly and successfully.
How The Exchange Works
Whether it’s paper, plastic, or metal, money has to come from somewhere. In the case of bitcoins, that somewhere is a computer. Much like online banking, the creation, exchange, and conversion of digital currencies takes place entirely online.
Every bitcoin user owns a wallet. The transactions that occur within that wallet are documented in a blockchain, which is a tamper-proof ledger of information that’s accessible by everyone who uses digital currency.
Mining takes place when people use their computers to calculate and document public transactions. As people exchange bitcoins, the information about those exchanges is added recorded in packets of information called blocks. Those blocks are then chained together and the records are added to bitcoin’s public ledger.
That’s where more bitcoins are created…
Where They’re Found
Think of gold miners: They know that there’s gold to be found and they know where to find it. They’ve just got to search until that happens.
Bitcoin follows the same general idea. People who set out to mine bitcoin set up software and run programs that seek to verify the transactions in which other users are engaging. Someone (or something, rather) has to do the math and balance the figurative checkbook.
When a miner’s software has found the right key to unlock a blockchain, the miner receives a reward of 25 bitcoins. That reward halved to 12.5 in 2017 and will reduce by half every four years going forward.
Right now, it takes around 1.7 billion attempts to find the correct key that verifies a blockchain. The creator of this currency also set a finite limit on a number of bitcoins that will ever exist. That limit is 21 million. Over 16 million coins have been mined so far, and many experts predict that the remaining millions will be mined far sooner rather than later.
Racks of computers in a mining farm look like this:
Moving On To Ethereum
Other forms of digital and cryptocurrency are built with blockchain technology, such as Ethereum.
Ethereum differs from the pack, though, because it’s not a currency. Instead, Ethereum is a blockchain network that lets developers create and run programs of many kinds, and they don’t all have to do with currency.
Its users do exchange a currency called Ether throughout the network, which helps finance the work that goes into creating and maintaining projects.
Think of it like this: The creators of Ethereum want it to serve as a global computer that encrypts information, taking it out of the hands of the third parties that currently store our data.
It’s powerful today, but plenty of critics express worry about security, usability, and scalability.
Want Your Own?
Looking to the future, many experts predict that the future economy as a whole will be digital and decentralized. Today, Bloomberg points out that the value of all bitcoins in circulation is moving very close to the value of gold held by exchange-traded funds.
That being said, there’s still plenty of risk involved in the purchase and exchange of bitcoins (and digital currencies as a whole). The markets are volatile and have been hacked before. Funds aren’t insured. Digital coins are just like paper currency, so if your wallet is lost or stolen, you won’t see it again.
If you’re a techie or you take interest in up-and-coming fringe technologies, you might be like the rest of the world’s digital currency enthusiasts. For some, it’s more of a hobby than a secure investment.
That doesn’t mean that people haven’t ever cashed out in a major way, though.
Someone with an extensive mining setup at home might have a room in their house that looks like this:
Where To Learn More
Plenty of online spaces like the forums on Bitcoin.org and different communities on Reddit share extensive coverage and discussion of digital currencies. Conferences, events, and meetups also take place, allowing people to network and exchange knowledge.
You’re responsible for your own security and behavior, so it’s wise to spend hours upon hours researching before jumping in.
In June 2017, Mark Cuban tweeted his own hesitations about cryptocurrency. “I think it’s in a bubble,” he wrote. The price of bitcoin promptly dropped by 5%, and he later reiterated his earlier thoughts. He again explained that bubbles occur “when everyone is bragging about how easy they are making money.”
Economists are also hesitant, but it’s not because of the digital currency itself. Plenty of experts identify blockchain technology as incredibly innovative and useful. It’s the coins themselves that cause worry.
“I’m not as negative as it may seem,” said Yale economics professor Robert Shiller to CNBC, “but I think that the thing that’s driving bitcoin at the moment, like other examples of bubbles, is a story.
“The story has inspired young people and active people, and that’s what’s driving the market.”