The Future of Cryptocurrencies

A cryptocurrency is a digital currency. Bitcoin was invented in 2009. While Bitcoin attracted a growing amount of followers. It captured significant investor and media attention in April 2013. It peaked at a record of $266 per bitcoin in preceding two months. Bitcoin's market cap is over $2 billion at its peak.

Bitcoin – the Current Standard

Bitcoin is a decentralized currency. It uses peer-to-peer technology- it enables functions such as currency issuance and transaction processin. Decentralization frees Bitcoin from government manipulation but there is no central authority to ensure things run smoothly. Bitcoins are created by using the digital “mining” process. It requires powerful computers to solve complex algorithms to 'mine' Bitcoins. 25 Bitcoins are made every 10 minutes and will be capped at 21 million.

These traits makes Bitcoin different from a fiat currency. Fiat currency issuance is a highly centralized activity. Banks regulate the amount of currency. Local currency deposits are insured against bank failures by the government. Bitcoin has no such support mechanisms. Bitcoin is dependent on what investors are willing to pay for it.

Increasing Scrutiny

Bitcoin’s main benefits is decentralization and transaction anonymity. In March 2013, FinCEN issued rules that defined virtual currency exchanges and administrators as money service businesses. In May that year, the DHS froze an account of Mt. Gox – which was the largest Bitcoin exchange – that was held at Wells Fargo, alleging that it broke anti-money laundering laws.

Alternatives to Bitcoin

Bitcoin’s success and growing visibility has increased since it has launched.Many other alternative cryptocurrencies, such as:

Litecoin – Litecoin is regarded as Bitcoin's leading rival presently. It was designed for processing smaller transactions faster. It discovered in October 2011 as "a coin that is silver to Bitcoin’s gold,” .

Ripple – Ripple was launched by OpenCoin. And was founded by technology entrepreneur Chris Larsen in 2012. Ripple is both a currency and a payment system. The currency component is XRP, which has a mathematical foundation like Bitcoin.

MintChip – MintChip is the creation of a government institution, specifically the Royal Canadian Mint. MintChip is a smartcard that holds electronic value. It can transfer it securely from one chip to another. MintChip does not need personal identification. It is backed by a physical currency, the Canadian dollar.

The Future

Some limitations that cryptocurrencies presently faced – such as the fact that a digital fortune can be erased by a computer crash, virtual vault or may be ransacked by a hacker. Somthing harder is a basic paradox that bedevils cryptocurrencies – the more popular they become, the more regulation and government scrutiny they are likely to attract, which erodes the fundamental premise for their existence.

The number of merchants accepting cryptocurrencies has steadily increased.For cryptocurrencies to become popular, they have to first gain widespread acceptance among consumers. However, their relative complexity compared to conventional currencies will likely deter most people, except for the technologically adept.

For a cryptocurrency to become widely used it has to satisfy widely divergent criteria. It would need to be mathematically complex but easy for consumers to understand; decentralized for protection; and preserve user anonymity.

Should You Invest in Cryptocurrencies?

If you are considering investing in cryptocurrencies, it may be best to treat your “investment” in the same way you would treat any other highly speculative venture. In other words, recognize that you run the risk of losing most of your investment, if not all of it. As stated earlier, a cryptocurrency has no intrinsic value apart from what a buyer is willing to pay for it at a point in time. This makes it very susceptible to huge price swings, which in turn increases the risk of loss for an investor. Bitcoin, for example, plunged from $260 to about $130 within a six-hour period on April 11, 2013. If you cannot stomach that kind of volatility, look elsewhere for investments that are better suited to you. While opinion continues to be deeply divided about the merits of Bitcoin as an investment – supporters point to its limited supply and growing usage as value drivers, while detractors see it as just another speculative bubble – this is one debate that a conservative investor would do well to avoid.

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