If you’re antsy about your financial future and wondered about how you can generate extra income outside of your 9 to 5, then you’ve probably heard about cryptocurrencies as a way of earning extra cash.

Thanks to the growing popularity of Bitcoin, this disruptive innovation has caused a spectrum of reactions from the financial world. However, this highly technical means of trading often has the average Joe stumped.

Counting Coins breaks down the basics in terms of cryptocurrencies and the way they work.

What is a cryptocurrency?

Cryptocurrency is a variation of digital currency that has seemingly changed monetary transactions. But what is cryptocurrency and how this phenomenon being monetised?

Mining through a barrage of information in the media will leave you with more questions than answers. Yet, simply defined, cryptocurrency is a digital currency that uses cryptography for security, therefore making it difficult to counterfeit because of this security feature. Its defining feature is that it is not issued by any central authority (in other words, it is decentralised), which means that is no intermediary (like the government and central banks). Transactions are made anonymously and free of charge.

Bitcoin

In 2009, a software developer under the pseudonym Satoshi Nakamoto proposed Bitcoin as an electronic payment system, based on mathematical proof, with the idea that it could produce decentralised trade of goods and services.

Bitcoin is the granddaddy of cryptocurrencies, and with a current share value of $1,200 per bitcoin, it is fast becoming a reputable method of payment despite banks’ warnings of discretion.

How it works

Firstly, there is a difference between Bitcoin and bitcoin. The former, which is capitalised, refers to the entire system itself, while bitcoin is the actual currency. In some places, you can use bitcoins to pay friends and retailers. Every single purchase is immediately logged digitally (on computers) on a transaction log that tracks the time of purchase, and who owns how many bitcoins. This digital transaction log is called ‘blockchain’.

The blockchain records every single transaction – old and new – and the ownership of every single bitcoin in circulation. The people who are constantly verifying the blockchain, ensuring that all the information is correct, and updating it each time a transaction is made, are called ‘miners’. Their job is to ensure that the transaction is secure and processed properly and safely. In return for their services, miners are paid fees by the vendors or merchants of each transaction.

Many big corporations like WordPress, Microsoft and Reddit accept bitcoin as a form of payment. More than $1.5 billion worth of bitcoins are currently in circulation around the world, with millions of transactions occurring daily. Needless to say, the popularity and usage of Bitcoin is picking up very quickly, as more and more businesses and individuals are becoming aware of its benefits and advantages over traditional currencies.

Just like any other currency, bitcoin’s value is constantly fluctuating, relative to traditional currencies.

Is it legit?

The Bitcoin craze is divided into two camps: those who are highly enthusiastic about its potential to completely reconfigure money-generating behaviour, and those who are incredibly sceptical about its viability. Many of the world’s financial leaders have thrown caution to the wind, and many ordinary consumers are also swarming to purchase bitcoins. Although it has some great strengths, there are significant drawbacks to this new craze. Forbes.com cites three things to consider before buying bitcoins.

Losses

According to Forbes.com, traditional financial products have strong consumer protection. If someone makes a fraudulent transaction with your credit card, or your bank goes belly-up, there are laws in place to limit consumer losses. Bitcoin has no such safety net. If your bitcoins are lost or stolen, there’s no intermediary with the power to make you whole.

Regulation

Recently, the federal agency responsible for combatting money laundering announced new guidelines for virtual currencies. However, for the most part, cryptocurrencies are still decentralised and not regulated by central banks.

Lack of applications

Finally, there’s a real question about how useful Bitcoin actually is. Bitcoin is popular for drugs and gambling, but many question whether it is used for more conventional forms of commerce. Bitcoin optimists point to sites like BitcoinStore, which says it did $500 000 in sales last month, but it’s hard to see how that kind of modest turnover can justify the current value of outstanding bitcoins, which is now well north of $1 billion.

Economist, Dawie Roodt, recently stated in a radio interview that consumers should not view cryptocurrencies as an investment at this stage, because of the volatile nature of this emerging technology. However, consumers should try to understand how trading in Bitcoin and other cryptocurrencies works, as there is a definite possibility that cryptocurrencies will play a significant role in trade in the future, with effects on everything from the decentralisation of banks, to influencing fiscal policies worldwide.

Furthermore, the major South African banks recently announced that they are collaborating to build a sovereign blockchain for the country to explore how this technology can benefit South Africans. Finance minister, Malusi Gigaba, also announced that the ministery would be looking at regulating cryptocurrencies. Consumers would do well to take heed, and learn about cryptocurrencies, as they may very well lay the foundations for trade in years to come. As always, keep an eye on Counting Coins for more.

About The Author

Chwayita January

Chwayita January, or ‘Ceejay’ for short, is an Honours student in Media Studies and our resident social media and copywriting assistant. Ceejay is a self-deprecating aspiring writer, with a twang that will make you question her nationality.

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