What are cryptocurrencies? Hm… Good question! But, let’s start with something that’s just a tiny bit easier.
What aren’t cryptocurrencies?
In fact, cryptocurrencies are not like anything we are used to having it our wallet or keeping track of in our bank accounts.
They are not this
These items all represent currency that the Bank of Canada stands behind
and the Bank of Canada does not stand behind cryptocurrencies neither does any other central bank or government or in fact any institution.
Which is what we mean when we say that cryptocurrencies are decentralized.
Even though cryptocurrencies are decentralized, it does not mean that they do not follow any rules.
They do. It is just that those rules exist outside the traditional financial system
and within a computer network.
In 2009 Bitcoin, the first decentralized digital currency, introduced a technology known as the blockchain
Imagine the blockchain as an enormous ledger in which every transaction of the network is recorded.
Making sure no user can cheat the system by spending the same money twice.
Thousands of specially equipped users around the world known as miners
verify these transactions recording them on the blockchain that earns those miners new Bitcoin.
It’s a permissionless system.
That means nobody needs permission to become a user or a miner and no institution is in charge of the system.
But why it could be a trouble of using cryptocurrencies?
What’s wrong with cash debit and credit?
Some people are in favor of money that is not managed by governments that functions outside of existing bank systems a political statement.
Others regard cryptocurrencies as investment opportunities if you’re able to catch cryptocurrencies on the way up and sell before they head down in value you can make a tidy sum.
Just like cash transactions, there is no exchange of personal information when you buy something with cryptocurrencies.
With them users cannot make transactions online anonymously. This can be attractive for many reasons.
But nothing’s perfect.
It may be possible to use information outside the blockchain to reveal the identity of a user.
The FBI used that kind of information to help shut down Silk Road, an illegal goods trading platform that used Bitcoin.
Concern over cryptocurrencies is growing, a number of countries, including Canada, plan to develop coordinated policies to regulate this new form of currency.
Cryptocurrencies are on the rise. It’s a story still unfolding.