The use of cryptographic currency and smart contracts (scripts residing on the blockchain that allow the automation of complex transactions) will revolutionise trading. Its potential is staggering but there are also challenges in implementing such complex structures.
Cryptography has been used for many years within the financial industry, mainly to secure e-payments and their associated accessories and networks. However, from the early 1980’s various research papers were published about the subject of digital currencies. An overriding theme was the use of cryptography and other security primitives such as hashing and digital signatures to provide proof of ownership in a distributed system and anonymity for those taking part in transactions. A paper published in 2008 using the pseudonym Satoshi Nakamoto promised both and Bitcoin has now become the leader in digital currencies.
Bitcoin is a digital currency which, through a process of cryptography and hash functions, allows participants to trade and buy goods anonymously. Participants have in their possession a digital private key which is used to transfer ownership of bitcoins and allow trading. Unlike physical currencies and other proposed digital currencies, Bitcoin relies on a decentralised ledger to register ownership of Bitcoins.
Bitcoin isnt the only digital currency but to evaluate the rest you must have an understanding of how Bitcoin works and what it has to offer
There are a number of strategies for investing in Bitcoins. As with other currencies, the value of Bitcoins can rise and fall. However, unlike other currencies, the two major drops in the price of bitcoins was due to worries about its security and technological concerns as opposed to global economic conditions.
A process called mining is rewarded by the creation of bitcoins for successful mining and a transaction fee.
Due to the ledger being decentralised, agreement on who owns bitcoins is reached by a consensus process. All participants have a local copy of the ledger on their computers or whichever device is connected to the bitcoin network. All those with computing power are encouraged to verify new transactions which also verifies who owns the bitcoins and prevent double spending (the illegal process of sending the same coin to two or more different entities).
The process of mining requires exceptional computing power. In the history of bitcoin, technology for mining has gone from specialised rigs, networks of GPU’s to specialised ASIC’s.
Using ASIC’s for blockchain hashing is the only profitable method to perform hashing. However, developing and delivering the ASIC on time is fraught with problems. Mining ASIC’s are sensitive to power consumption which affects the profitability of the implementation. Choosing the correct technology will not ensure low power consumption. Choose a company with years of experience building secure ASIC’s.
In the future, successful miners will no longer be able to generate bitcoins but have to rely solely on transaction fees. This will require the miner to have the fastest most powerful ASIC’s to be profitable.