By now you’ve probably heard about Bitcoin, Ethereum or other digital currencies, but really, what the heck are they?
This new way to potentially pay for things is called cryptocurrency and it is not controlled by any central bank like regular paper money and coins are. And this cryptocurrency is not yet widely accepted by merchants as payment for goods or services.
So what’s its draw and why are so many people talking about it?
Cryptocurrencies are a bit like stocks – they can rise or fall based on demand and when demand is high the value of a currency like Bitcoin can rise substantially, making some people proverbial overnight millionaires. Which is all well and good – until demand drops and that value shrinks.
Whether its value is high or low at any given point in time, cryptocurrency transactions are tracked by something called the blockchain, an encrypted digital ledger that is constantly updated and spread across computers around the world. This blockchain is used to record all transactions, and, in theory, it is safer than a central database where personal information is stored. The blockchain stores transaction information as a series of numbers, letters and hashes, and altering a block in the chain would invalidate the transaction.
That type of security can be a big advantage, but from a consumer standpoint at this time security is not the biggest issue. Ease of use and volatility are the big factors.
While consumers can buy cryptocurrencies with real dollars and manage those currencies via digital wallet apps, the limited number of merchants that accept this kind of payment and the big potential swings in value of the currencies make using digital currency less than ideal at this point in time.
So what do the experts say? Many recommend waiting to jump on the cryptocurrency bandwagon until the technology is more widely accepted. And at this point they say to think of cryptocurrency more as an investment and to be prepared for a possible bumpy ride.