In the last months, large investors, banks, companies, and the general public have shown an intense acceptance of digital currencies such as Bitcoin.
By: Edda Pujadas
Digital currency or cryptocurrency has occupied a large part of social media platforms in recent years. The increase of online purchases and transactions during the pandemic has exponentially accelerated interest in using these digital currencies as an alternative to financial management in a much more digitalized world today.
“Today, there are two types of people; those that are already using digital currency and those that are going to use it.” Economist Ivan Jimenez uses this phrase to explain that the money as we have conceived it until today is dying. Money is being substituted by a new form of monetary exchange that is supported in technology: it is easy to adapt and avoids all types of devaluation.
Ivan Jimenez believes that to understand the digitalization of the currency, the first thing that we need to do is learn what a currency is and how it originates. Currency is a way to exchange goods and services that are backed by the Central Bank. Now, the digital currency has a new shape, one that is not tangible because it is not paper or coins.
Bitcoin is a digital currency, but it is not the only one. Today there are many other digital currencies such as Ethereum, Litecoin, and Dogecoin, which is a much more evolved version and offers more security and freedom to conduct financial transactions.
Ripple is another digital currency; this one was mainly created for credit transactions; in this, the users are the ones that loan money among themselves and register the debt and credits.
Most of the applications and websites that are related to these currencies are evolving very quickly due to their high demand. Most of these digital currencies are sold for cents of the nominal value of a dollar. Its price constantly fluctuates the same way it does with the dollar or euro, and the volatility of these currencies can be extreme because there is no entity that controls them; these currencies fluctuate in direct relation to the way in which the market moves.
To really understand how digital currencies work, Ivan Jimenez explains that “for many years we have already created a relationship with digital transactions. We send and accept financial transactions where we do not see the money; we trust in a figure that goes from “A” to “B” and that for our peace of mind is insured by a bank, and for this reason, we believe this is a safe transaction.”
The most important part of digital transactions is security because there is no Central Bank or any intermediary bank that supports them. It is simply a transaction agreement between two parties. So, how is that monetary exchange insured or validated? The answer is through Blockchain.
Blockchain was invented in 2008 by a person or group under the name of Satoshi Nakamoto. It was created to be used as the accounting record for public transactions for Bitcoin. As of today, the real identity of Satochi Nakamoto is still unknown.
Blockchain is what makes a digital transaction valid. It is an information registry system that works in a way that makes it difficult and does not allow to make any changes, to hack or deceive the system because it duplicates itself and is distributed through a network of computer systems in a chain of blocks. Each block in the chain contains a series of transactions, and each time a new transaction is created, a new registry is added, and this generates a database.
The Blockchain includes the identifier of the last block into the identifier of the next block, thus creating an unbreakable and immutable chain. The code to keep the blockchain data in a manageable and safe way is through an algorithm called “hash” combined with a data consolidation structure known as “Merkle Tree.”
When a transaction has been verified and needs to be added to a chain, this will be processed through a “hash” algorithm to turn it into a unique series of numbers and letters, similar to what a random password generator will create.
After the previous step, two “hash” transactions will be combined, and these will again be processed to create another unique “hash”. This process of combining multiple transactions in a new “hash” will continue until we finally get to one that will be called the“root hash”.
It is impossible to decompose the hash or revert the process by using the numbers and letters in it to try to figure out the original data. If the process is repeated exactly with the same transactions, the same “hash” will be created.
This allows for anyone using a Blockchain to be able to verify that the data has not been manipulated because any change in any part of the data will result in a completely different “hash” and this will affect each iteration all the way to the “root hash”. This is what is known as “Merkle Tree”.
To exemplify this process, states Jimenez, “let’s consider that there are a million servers in the world and that these are simultaneously validating a digital transaction. This implies that the previous transactions were also validated and that, to undo or delete the one you did, all the previous transactions will have to be eliminated at the same time.”
So, where is the danger? This asset is not kept anywhere, to keep it you need to have a “wallet” and there has to be an “exchange” that registers the block transaction.
A digital wallet allows people to store and manage their transactions and digital coins. This wallet manages transfers in cryptocurrency, assist in exchanging funds in an efficient way, and can exchange them back into the local currency of the user. These transactions are safe because they are signed cryptographically.
According to the experts, the best wallets in 2021 are Exodus (for those that are beginners), Electrum (for advanced users and those that are only interested in Bitcoin), Mycelium (for mobile users), Ledger Nano X (the best hardware wallet), Trezor Model T (for several cryptocurrencies) and Ledger Nano S (the most efficient cost-wise).
You should also have an exchange account that you will have to link to your wallet; this will allow you to exchange currency. This is the platform that will allow you to convert “real money”, such as dollars, into digital currency.
The most recommended platforms or apps for your exchange account are Coinbase and Coinbase Pro (the best generally speaking), Cash App (for beginners), Binance (the best for Altcoins), and Bisq (for decentralized exchanges).
Speaking about the massification of digital currency, Ivan Jimenez considers that the use of this currency will become more generalized in the future, given that today there are already accepted for the purchase of products such as real estate and automobiles.
Credit card companies such as Visa and Mastercard decided to ease cryptocurrency transactions for their customers. PayPal also announced recently that they will be allowing their customers to buy products using cryptocurrencies such as Bitcoin, Litecoin, Ethereum, or Bitcoin Cash. Even governments are also investing in this technology!
Another point in favor of the use of digital currency is the simplicity of its use. It is as simple as accepting to send a transaction and for the other person to accept to receive it. It is like a money email.
Investing in digital currency also carries certain risks. One of them is that these are susceptible to mistakes and hacking.
Jimenez warns that the highest crime related to these technological exchanges is the attack on digital wallets. He recommends that before you get into the cryptocurrency market, you get educated in them, learn the terminology, the risks, and ways to ensure your assets at the same time that you learn how to get the best value for your money.