These days, online transactions are becoming the norm. Online shopping, financial transactions, and banking are more and more popular. In trying to make online payments more secure, a system has been created called cryptocurrency. Bitcoin is the most well known and was the first to enter the marketplace. Since 2009 other types of cryptocurrency have also been created (Litecoin, Namecoin, Ethereum, just to name a few). Cryptocurrency, which only exists digitally, works by utilizing an encrypted algorithm to send payments which makes it more secure and without the need for a third party such as a bank or financial institution. For the sake of simplicity, I will use Bitcoin as an example throughout this article.
Each Bitcoin has a designated value which rises and falls in much the same way that the value of a dollar rises and falls. This value is based on a seller’s willingness to accept it for the goods sold or how much investors are willing to pay for a Bitcoin. A single Bitcoin may be worth $3,500 and can be subdivided, depending on the value of the transaction, down to a trillionth of its value which is unlike the dollar which can only be subdivided by a hundredth of its value (a penny) at most.
Bitcoins are handled digitally and managing transactions using Bitcoins are almost impossible to be forged. Accounts (called wallets) using Bitcoin are private. All cryptocurrencies use blockchain technology which is a digital system that has the total history of all past transactions from the beginning to the present. As such, cryptocurrency accounts are not part of a bank. The transaction is maintained by the user. There is no government, corporation, or central bank that has access to a person’s funds or personal information.
There are some disadvantages with cryptocurrencies. Due the privacy of the cryptocurrency transaction, money laundering and tax evasion are possible, although past attempts have been discovered and prosecuted. Since cryptocurrency is digital, there is no physical cash that can accessed. And should a computer crash, a cryptocurrency balance could be wiped out unless a backup copy of the holdings has been made. In addition, the value of cryptocurrency can swing wide. Bitcoins have gone from a high of $19,000 per coin at the beginning of this year (January 2018) to its current value of about $3500 per coin (December 2018). If you would like more information on cryptocurrency, you can refer to this website:
Mary Fox Luquette, MBA, CLU, ChFC is a finance instructor in the B I Moody III College of Business at the University of Louisiana at Lafayette.