Andrew Urquhart, University of Reading

Bitcoin, the first and leading cryptocurrency in terms of trading volume and market capitalisation, went through its third “halving” on May 11 2020. This major adjustment to how the cryptocurrency operates has only happened twice before and happens every four years. But what does this actually mean and what impact will it have?

Q: how does bitcoin work?

Bitcoin is a digital currency that makes use of blockchain technology to store and record all transactions. First proposed in a white paper published online in 2008 by a mysterious person (or group of people) called Satoshi Nakamoto. The unique features of bitcoin compared to fiat currencies like dollars or pounds are that there is no central authority or bank. Each member of the network has equal power. This decentralised network is completely transparent and all transactions can be read on the blockchain. At the same time it offers privacy in terms of who owns the cryptocurrency.

Bitcoins are created (or mined) by so-called miners who contribute computing power to securing the network, as well as processing transactions on the network by solving complex mathematical puzzles through computational power. These miners are rewarded for their work processing the transactions on the blockchain with bitcoins. But to combat inflation, Nakamoto wrote into the code that the total number of bitcoins that will ever exist will be 21 million. Right now there are 18.38 million.

The first ever block recorded on the bitcoin blockchain was on January 3 2009 where Nakamoto received 50 bitcoins. In the white paper, Nakamoto specified that after every 210,000 blocks the reward for miners will half. So the first halving took place on November 28 2012 where the miner’s reward was reduced from 50 bitcoins to 25 bitcoins. The second halving was on July 9 2016 and the miner’s reward was reduced from 25 bitcoins to 12.5 bitcoins. And the third, most recent halving on May 11 2020 means bitcoin miners now receive 6.25 bitcoins.

Q: Why does bitcoin halve?

Nakamoto has never explained explicitly the reasons behind the halving. Some speculate the halving system was designed to distribute coins more quickly at the beginning to incentive people to join the network and mine new blocks. Block rewards are programmed to halve at regular intervals because the value of each coin rewarded is deemed likely to increase as the network expanded. However, this may lead to users holding bitcoin as a speculative asset rather than using it as a medium of exchange.

Q: What impact does halving have on bitcoin?

The obvious impact is that the amount of newly mined bitcoins per day will fall from about 1,800 to 900 bitcoins and the daily revenue of miners will reduce by half. This decrease in the rate of bitcoin creation tightens supply and some argue will lead to a bullish market and an increase in the price of bitcoin.

Meanwhile, the reduction of revenue for miners may squeeze out miners who are least efficient and therefore the computing power connected to the Bitcoin network may fall significantly.

The previous two halvings led to the most dramatic bull runs in Bitcoin’s history, although initially there was a brief sell-off. Marcus Swanepoel, co-founder and CEO of Luno, a cryptocurrency wallet which lets you store and carry out bitcoin transactions, believes that bitcoin may achieve a growth of 270% between this and the fourth halving in 2024.

Q: How is coronavirus affecting things?

Although bitcoin has gained more than 20% since the beginning of the year, where this halving may differ from its predecessors is the volatile and uncertain economic environment that it has taken place in. The International Monetry Fund predicted a 3% shrinking of global growth in its April forecast and this is expected to fall further. In the UK, the Bank of England has projected a decrease of 30% in the country’s GDP during the first half of 2020.

Some argue that bitcoin’s scarcity makes it a potential hedge against fiat currencies that are vulnerable to devaluation in times of economic crisis. But others believe the halving won’t necessarily boost its price as people knew the halving was going to happen so it should be already priced into the market activity.

The only certainty is that the growth of new bitcoins has halved. It remains to be seen what impact this will have on the price and interest of this cryptocurrency.

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Correction: a previous version of this article incorrectly said Michael Dubrovsky speculated the halving system was designed to distribute coins more quickly at the beginning to incentive people to join the network and mine new blocks.

Andrew Urquhart, Associate Professor of Finance, ICMA Centre, Henley Business School, University of Reading

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Rabindra Ratan, Michigan State University and Yiming Lei, Michigan State University

The metaverse is a network of always-on virtual environments in which many people can interact with one another and digital objects while operating virtual representations – or avatars – of themselves. Think of a combination of immersive virtual reality, a massively multiplayer online role-playing game and the web.

The metaverse is a concept from science fiction that many people in the technology industry envision as the successor to today’s internet. It’s only a vision at this point, but technology companies like Facebook are aiming to make it the setting for many online activities, including work, play, studying and shopping. Facebook is so sold on the concept that it is renaming itself Meta to highlight its push to dominate the metaverse.

Metaverse is a portmanteau of meta, meaning transcendent, and verse, from universe. Sci-fi novelist Neal Stephenson coined the term in his 1992 novel “Snow Crash” to describe the virtual world in which the protagonist, Hiro Protagonist, socializes, shops and vanquishes real-world enemies through his avatar. The concept predates “Snow Crash” and was popularized as “cyberspace” in William Gibson’s groundbreaking 1984 novel “Neuromancer.”

There are three key aspects of the metaverse: presence, interoperability and standardization.

Presence is the feeling of actually being in a virtual space, with virtual others. Decades of research have shown that this sense of embodiment improves the quality of online interactions. This sense of presence is achieved through virtual reality technologies such as head-mounted displays.

Interoperability means being able to seamlessly travel between virtual spaces with the same virtual assets, such as avatars and digital items. ReadyPlayerMe allows people to create an avatar that they can use in hundreds of different virtual worlds, including in Zoom meetings through apps like Animaze. Meanwhile, blockchain technologies such as cryptocurrencies and nonfungible tokens facilitate the transfer of digital goods across virtual borders.

Standardization is what enables interoperability of platforms and services across the metaverse. As with all mass-media technologies – from the printing press to texting – common technological standards are essential for widespread adoption. International organizations such as the Open Metaverse Interoperability Group define these standards.

Why the metaverse matters

If the metaverse does become the successor to the internet, who builds it, and how, is extremely important to the future of the economy and society as a whole. Facebook is aiming to play a leading role in shaping the metaverse, in part by investing heavily in virtual reality. Facebook CEO Mark Zuckerberg explained in an interview his view that the metaverse spans nonimmersive platforms like today’s social media as well as immersive 3D media technologies such as virtual reality, and that it will be for work as well as play.

[youtube https://www.youtube.com/watch?v=cSp1dM2Vj48?wmode=transparent&start=0]

The metaverse might one day resemble the flashy fictional Oasis of Ernest Cline’s “Ready Player One,” but until then you can turn to games like Fortnite and Roblox, virtual reality social media platforms like VRChat and AltspaceVR, and virtual work environments like Immersed for a taste of the immersive and connected metaverse experience. As these siloed spaces converge and become increasingly interoperable, watch for a truly singular metaverse to emerge.

This article has been updated to include Facebook’s announcement on Oct. 28, 2021 that it is renaming itself Meta.

Rabindra Ratan, Associate Professor of Media and Information, Michigan State University and Yiming Lei, Doctoral student in Media and Information, Michigan State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Peter Howson, Northumbria University, Newcastle

Huge concrete data centres, permanently plugged into power plants and telephone exchanges, maintain much of online life. But the infrastructure behind internet-based cryptocurrencies such as bitcoin, dogecoin and ethereum is more like a rusty travelling circus. And right now, that circus is on the road.

Bitcoin relies on a network of millions of specialist machines, known as miners, around 70% of which are currently based in China. Like a never-ending game of Hungry Hippos, each player hammers their mining machines 24/7 to try and scoop up as many bitcoins as possible. With only a few hippos, its easy for everyone to be a winner. But with around 2.5 million miners chasing an ever-shrinking number of prizes, the game is becoming increasingly difficult.

Bitcoin’s booming popularity has caused its electricity demand to swell. With no central planning, a perpetual arms race for equipment continues, creating 15,000 tonnes of burned out electronic waste annually.

To maximise profits, mining machines are often crammed into shipping containers, with operators ready to up sticks at a moment’s notice to find the cheapest sources of energy. During China’s summer rain season, hydro power plants in the south-western provinces generate so much energy that miners can mop up the leftovers. But in the winter dry season, many miners unplug and hit the road, heading for the coal-fired power plants scattered across China’s vast northern territories.

Recent crypto price increases have encouraged some Chinese bitcoiners to mine coal and restart idle power plants without permission, endangering lives and threatening President Xi Jinping’s climate goals.

Bitcoin’s energy demand has more than doubled in a year from 55 terawatt-hours (TWh) to 125 TWh. The network now has a carbon footprint similar to the whole of Poland. Chinese regulators closed down all the country’s crypto exchanges in 2017. Even so, rocketing demand for bitcoin elsewhere means the network’s energy use in China is predicted to peak by 2024 at around 300 TWh. That’s equivalent to the total energy demand of the UK. With a crypto circus in tow, Beijing’s commitments to cut carbon emissions by 65% before 2030 would be near impossible to meet.

Bitcoin is not just China’s problem

In an attempt to reduce bitcoin’s environmental impacts in China, the coal-dependent province of Inner Mongolia recently banned bitcoin mining and set up a hotline to report suspected transgressors. But on average, mining just one bitcoin per day requires a US$1.8 million (£1.3 million) investment in specialist equipment. Expulsions from the province could force some highly invested bitcoiners underground, while forcing others to find new places to park up in neighbouring countries which don’t have China’s seasonal glut of renewable energy.

To prevent an influx of Chinese miners chasing cheaper electricity, Iran’s President recently clamped down on new oil-fuelled mining, which authorities blame for increasing urban smog. The Black Sea territory of Abkhazia is trying to hold back foreign miners as officials there are forced to introduce rolling blackouts due to energy shortages. Bitcoin mining has been blamed for overloaded electricity lines and power station fires, leaving some areas without power for days.

UK authorities have also paid the price for bitcoin’s boom. In May 2021, officers from West Midlands Police in the UK, believing they were raiding an illegal cannabis farm in Sandwell, instead discovered around 100 bitcoin mining machines running off an improvised connection to the electricity supply. The outdated machines were so inefficient that they could only turn a profit with stolen energy. These thefts raise energy prices for everyone else, causing fuel poverty and risking public safety.

Antisocial side effects

Demand for mining machines has caused computer chip shortages, hurting more useful industries struggling back to work post-COVID. UK carmakers have cut production while smartphone companies have delayed future launches. The price of specialist chips used by the likes of Intel and Apple have increased by around 70% so far in 2021, with knock-on effects for UK consumers.

Even universities and hospitals are affected by bitcoin’s second-order effects. According to the insurer, Hiscox, around 4,500 organisations fell victim to cyber attacks every day in the UK in 2018. Many of these involve ransomware payments, 98% of which are paid in bitcoin.

Some argue that to slow the increase in ransomware attacks, authorities need to crack down on cryptocurrency exchanges that enable bitcoin ransoms to be paid. Others claim that cryptocurrencies and ransomware are now so entwined that the only way to fight the latter is to ban cryptocurrencies altogether.

To clean up the crypto industry, a UN-backed Crypto Climate Accord and the Bitcoin Miners Council were established. These groups urge bitcoin miners in the US to only use leftover renewable energy. But it’s not possible to give a higher price to bitcoins produced using only renewables, because bitcoins are designed to be fully interchangable. Research shows that new miners joining the competition in North America have encouraged miners where there are no renewables to use more machines and work harder, increasing the network’s overall carbon footprint.

A global response

For regulatory purposes, bitcoin should be considered similar to the global trade in Chinese tiger parts. Banning tiger hunting in the UK is pointless, but banning the sale of tiger parts is useful. Likewise, when UK-based investors are allowed to speculate on bitcoin, they encourage an environmentally disastrous global industry that has so far failed to benefit anyone except criminals and some early speculators.

Cracking down on crypto exchanges or banning the import and use of mining equipment could be a relatively easy win for the UK as it prepares to host the 2021 UN climate summit. Doing nothing about the problem would negate the UK’s progress in other areas. Thanks to tax relief schemes and infrastructure investment, electric car registrations increased by 41% in 2020, preventing the release of around 50 million tonnes of CO₂ a year. Meanwhile, bitcoin mining causes nearly 60 million tonnes of CO₂ annually.

China appears committed to putting its own house in order, but bitcoin’s social and environmental impacts urgently need a global response.

Peter Howson, Senior Lecturer in International Development, Northumbria University, Newcastle

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Updated the Robots website: https://schmitt-trading.com/robots
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Expert advisor: EURUSDCCH4_EA

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Jack Rogers, University of Exeter

A mysterious, anonymous entity known as “Satoshi Nakamoto” posted a white paper on October 31 2008 entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”. It was the first time that the concept of Bitcoin entered the world. But outside of the cypherpunk mailing lists – those promoting the use of privacy-enhancing technology – this event was hardly noticed. Ten years on, who hasn’t at least heard of the cryptocurrency?

On just nine pages, the white paper explained how the Bitcoin system would work. Many attempts at electronic cash had already been made going right back to computer scientist David Chaum’s “Digicash” developed in the 1980s. Using an intricate dance of cryptography, Digicash enabled people to pay each other online anonymously, yet prevented users from sending the same money to two different people at the same time (the so-called “double spending problem”).

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Read more:
A history of Bitcoin – told through the five different groups who bought it

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For a while, Digicash caught on. Even the likes of Deutsche Bank adopted it, and a growing list of merchants started accepting it. Compared to the credit-based systems of Visa, Mastercard and later Paypal, at least some people could see the benefits of a currency that allowed micropayments with extremely low transactions fees. Anyone with libertarian tendencies loved the idea of using a currency outside the control of any authority.

But Visa and Mastercard upped their game and won the battle for payment dominance. It seemed the struggle was over, but some cypherpunks refused to give up. Adam Back created “Hashcash” in 1997, which together with Wei Dai’s “b-money” (both cited in Nakamoto’s white paper) and Nick Szabo’s “Bitgold” were the last significant efforts to create an online cash system before Bitcoin. The idea fizzled out following the dotcom bust of 2000-02. It was only brought back to life by Nakamoto in 2008.

Nakamoto’s vision

Previous attempts came close to creating secure digital cash, but there was always one major problem they encountered: the need for a trusted third party like a bank to maintain the system in some way. Nakamoto’s white paper solved this problem by distributing the process of maintaining a totally transparent public ledger (known as the blockchain) among a network of competing “miners”. As long as one miner does not control more than half of the whole network of computing power, the system is secure.

Cryptography, computer science, and now crucially an elaborate system of economic incentives all came together into a mindblowing overall piece of ingenuity. The cypherpunk vision to enhance privacy, limit government power and increase its transparency had finally been realised.

Or had it? If there was any lesson to be learned from the failure of Digicash, it was that you could invent a brilliant system, but you had to convince people to use it, despite them never being able to come close to understanding how it actually works. With Bitcoin, we have seen extraordinary hype, with astronomical price booms and busts, and thousands of spin-off cryptocurrencies and private blockchains that are all just variations of the original.

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Read more:
Anthill 23: Bursting the Bitcoin bubble

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Ethereum is arguably one of the most significant spin offs. It shows how blockchain technology can be combined with smart contracts, potentially providing a costless, decentralised way of replacing the colossal global army of trust-based service industries that conventional money relies on.

There is, however, only one existing blockchain that is consistent with Nakamoto’s vision: Bitcoin Cash, a so-called “hard-fork” of Bitcoin that generally shares the same history and protocol, except for two crucial details. The blocks on its chain are a massive 32-times larger than the original Bitcoin, and growing. More transactions per block, means lower fees per transaction, paving the way for global adoption. Plus, built-in codes that were switched off in the original Bitcoin, have been reignited, potentially allowing all the smart contract capabilities of Ethereum.

Vision accomplished?

The white paper itself is not explicit about goals, but the main implicit aim is clear: to create a secure form of online cash that does not depend on a trusted third party. This has already been demonstrated as a concept. The only question that remains is, to what extent will it be adopted?

A recent clue to that question may lie right in the heart of London’s financial centre, Canary Wharf. Here, the Brewdog company recently launched a promotional event accepting Bitcoin Cash as payment. It is cheaper for them to process payments compared to credit cards, even allowing for the cost of them having to convert Bitcoin Cash back to pounds sterling. Recently, computer companies Newegg and Microsoft have also started accepting Bitcoin Cash as payment.

Further afield, more and more developing countries like South Africa are experimenting enthusiastically with new apps that store Bitcoin Cash like Centbee, which may help people who can’t open bank accounts. A new app developed in Spain called HandCashapp and an even bolder concept called The Money Button hint at a whole new paradigm of automatic click-based micropayments that could also spell the end of pop-up adds appearing on popular content online.

Nakamoto’s vision, in some sense, may have already been achieved, but will Bitcoin Cash permanently replace all fiat currencies and become one global money? The world wide web arrived in 1990, and you could argue it took a dramatic collapse and 20 years before its true commercial potential could be realised. In 2028, maybe it’s not unfeasible that the technology underlying Bitcoin will do the same for global money and all trust-based financial, legal and other services.

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More Bitcoin articles, written by academic experts:

• Bitcoin’s rollercoaster ride reflects the biggest issue facing cryptocurrencies: regulation
• Beyond Bitcoin: how blockchains can empower communities to control their own energy supply
• Why energy-sapping bitcoin mining is here to stay

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Jack Rogers, Senior Lecturer in Economics, University of Exeter

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Gavin Brown, Manchester Metropolitan University and Richard Whittle, Manchester Metropolitan University

2020 could well be the year that the cryptocurrency dream dies. This is not to say that cryptocurrencies will die altogether – far from it. But to all the financial romantics who have cheered the rise of bitcoin and other digital currencies over the past decade, there is a reckoning coming. Like it or not, the vision of a world in which these currencies liberate money from the clutches of central banks and other corporate giants is fading rapidly.

It is not that these currencies have no place in the future of money. The encrypted blockchain technology that underpins them is extremely difficult for governments to control, so it is unlikely that they will ever be eliminated. In any case, they have a valid role to play as a geopolitical hedge – witness the surge in bitcoin and cryptocurrencies after the latest escalation in tensions between the US and Iran, for instance.

But 11 years on from bitcoin’s remarkable beginnings, cryptocurrencies are a long way from supplanting the financial system. At the time of writing, the total value of all the bitcoin in circulation is US$133 billion (£102 billion); in comparison, the market value of all the world’s gold is around US$8 trillion, while the total worth of mainstream currencies worldwide is roughly the same again.

No new hope

The so-called bitcoin maximalists foresee a day when their currency of choice rises into the top league. They point to the bitcoin “halvening” expected in May – the moment every four years when the number of new coins being added to the network is halved – as the next event that will drive prices up.

Yet the long-term prospect for bitcoin and other cryptocurrencies is stasis on the peripheries of the financial system. The chances of a new bitcoin look increasingly slim: it’s several years since ethereum rose to become the prime challenger, before falling back to a fraction of the bitcoin price (click on the chart below to make it bigger).

Bitcoin vs altcoins

More importantly, a much bigger threat to the current system is afoot – as evidenced by Facebook’s attempts to get its libra digital currency off the ground. JP Morgan has already launched a JPM coin for major institutional clients, while numerous other major banks are set to follow suit. Other tech giants like Amazon, Google and Apple are rumoured to be looking at launching rival currencies as well.

Their model is what are known as stablecoins – a sort of crypto hybrid that lives on blockchains but is pegged to mainstream currencies. But aside from this connection to the status quo, these multinationals would be challenging sovereign money. They want to opt out of the clunky system that they have been forced to operate in, with its transaction fees and international payment delays, to present customers with an alluring alternative instead.

The reason these companies are not throwing their weight behind bitcoin et al is because today’s cryptocurrencies have at least as many drawbacks as the mainstream system. Their prices are too volatile to act as a serious store of value, for instance, while their ability to process financial transactions is not yet particularly impressive.

It has dawned on the corporate giants that as per their products or services, they can make money part of their brand – part of the customer experience. Sell people goods and services, yes, but also offer them a new monetary system to take care of the purchases. It begins to look like almost total control.

The empire strikes back

The state has been late to wake up to this challenge, but has now done so in a powerful and surprising way. The traditional global infrastructure has proved strong enough to derail the corporates at least temporarily with red tape. Yet make no mistake – the goalposts have completely changed, and it will be difficult to present a united regulatory front around the world. Ironically, it is the same lack of global uniform regulatory approval for the existing cryptocurrencies that has hindered their meaningful adoption.

The other response under examination is to launch state cryptocurrencies. The likes of China and Russia are in pole position to launch the first within a couple of years. Deutsche Bank recently published a report suggesting that cryptocurrencies could overtake national fiat currencies within ten years, envisaging that these state-backed versions will lead the charge.

In short, the future of cryptocurrency lies in either corporate or sovereign digital coins – or more likely, an uneasy cohabitation of the two. The system supposedly under threat from bitcoin and the other so-called bank killers is instead assimilating them. The coins that emerge maybe won’t even use blockchains, acting more akin to Paypal or WeChat Pay than as cryptocurrencies as we know them.

Where the previous half century saw the rise of corporates to a size and influence comparable to nation states, the next half century could produce a new paradigm in which they increasingly behave like nation states. When we reflect on the way these companies already manage our data, the way they exert lobbying influence on our governments, the trend is clearly well underway. Call it the next phase of globalisation.

Money in 2030 will probably therefore be almost unrecognisable compared to what we use today. The dream of universal people-powered monetary substitutes is being crushed by this unanticipated but in hindsight inevitable institutionalisation. It is from within the multinational world that the “next bitcoin” will emerge – wrapped in the liveries of a corporate brand, if not a sovereign flag. As for the great dream of bitcoin liberation, may it rest in peace.

Gavin Brown, Senior Lecturer, Finance, Manchester Metropolitan University and Richard Whittle, Research Fellow in Economics, Manchester Metropolitan University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Pj Radcliffe, RMIT University

The cryptocurrency Bitcoin has been in the news lately with a sudden surge in value followed by a spectacular crash – not to mention the unfortunate tale of US$4 million in Bitcoin on a hard drive that was accidentally dumped in a rubbish tip.

Bitcoin was the first widely used cryptocurrency, but few people know it is not the only one. So how do the top five cryptocurrencies by capitalisation compare?

Bitcoin

The core of Bitcoin is a loose alliance of people (“miners”) who process and add transactions to the Bitcoin public record and get rewarded with Bitcoins for their efforts. This process (predictably enough) is called mining. Changes to the mining process are negotiated and when 80% of miners agree, the change becomes mandatory.

This process has worked well because the miners have an interest in keeping a stable reliable system that does not drop in price or go into a bubble then crash. The value of a Bitcoin is set by the market, which is the shared delusion of market players as there is no backing to the currency.

In terms of risk it sits some where between the share market, which can drop significantly but seldom to zero, and the derivatives market where you can lose more than you invested.

While Bitcoin transactions are public the true identities can be hidden so it’s an easy way to purchase illegal goods or shift money around the world from one Bitcoin wallet to another and then to a normal currency. The low transaction fees and inability to track and tax money also appeals to some.

So why even look at alternatives to Bitcoin? There are two main reasons:

1. the recent burst of the Bitcoin bubble
2. there’s a problem with the rewards to keep miners in the system. Mining rewards are dropping and eventually there will be no more new Bitcoins mined, as there is an inbuilt limit of 21 million Bitcoins. Will the very small transaction fees be enough to keep honest miners in the system – or will transaction fees need to rise?

Litecoin

By capitalisation, the next biggest cryptocurrency is Litecoin. It’s built on Bitcoin ideals but aims to have a wider range of miners with algorithms that do not give a great advantage to hi-tech miners. This aim has been only partially met. Tweaks such as faster transactions and a bigger currency limit also help but the same problems that plague Bitcoin will also affect Litecoin.

While the value of Litecoin jumped 100% in 24 hours at one point, it also dropped 80% over time.

Bitcoin can be converted into other currencies quite easily but to date this is difficult with Litecoin and the other cryptocurrencies, the best path being to Bitcoin then a normal currency.

Peercoin

Peercoin has a built-in interest rate of 1% per year, which is trivial compared to exchange rate movements. Each transaction costs 0.01 Litecoin which does not suit high volume or low value trading.

At present it has a centralised transaction checking system, controlled by Peercoin’s creator Sunny King. In theory this will be removed down the track, but for now, it remains.

Namecoin

Namecoin is built on Bitcoin technology but adds a parallel internet which is uncensored and outside government control. While lack of government control sounds appealing it also implies that security exploits will not be blocked by the know-how of big corporate carriers or the government.

As a result Namecoin is a much riskier option than Bitcoin, which does diminish Namecoin’s attraction.

Quarkcoin

In concept, Quarkcoin (or Quark) is close to Litecoin. It has faster transaction times than Bitcoin (typically a few minutes versus an hour). Its security algorithms are much more advanced than Bitcoin and this means that normal PCs can be competitive in mining coins. Miners who buy expensive high speed machines for Quarkcoin will have much less of an advantage than those doing the same for Bitcoin.

Does encryption matter?

The new cryptocurrencies discussed here are based on Bitcoin but all have added tweaks which may make them better technologies in the longer term. For now Bitcoin is by far the biggest with about US$12 billion value which is some 16 times bigger than its nearest rival Litecoin. Bitcoin is also a proven technology that has withstood the acid test of many hacking attacks.

In the long-term, a concern is the weakness of the SHA-2 encryption algorithm which is the basis of all cryptocurrencies above, with the exception of Quarkcoin.

For now it appears impossible to crack but who knows what the amazing computer power of security agencies can do now, and what commodity computers will do in five years time. Quarkcoin may be the better long-term bet with its superior security algorithms and faster transaction times.

Now back to you

When should you use a cryptocurrency? If you are an investor who enjoys playing the market then all cryptocurrencies have a lot of ups and downs and if you get it right there is money to be made.

There is a lot of good theory about boom and bust in speculative markets. Expect to lose if you are not a knowledgeable investor who is familiar with charting and market psychology. Margin trading is already happening, so you can profit (or lose) on rises and falls in cryptocurrencies.

There are many tales of fraud and other problems so be very careful and read a lot before you do anything. Some claim the market is being manipulated by big players who can cause booms and busts and make money from it.

The long term investment value of cryptocurrencies is uncertain. The current crop of reports about sudden fortunes being made is in no way a good predictor for the future.

If cryptocurrencies are like other speculative activities, the early players and the big players benefit to the detriment of the late entrants and the small players. Given the recent spike in cryptocurrency values we are most likely past the early entry stage.

There is an increase in real businesses willing to accept Bitcoin and this may help the long term outlook. You can see Bitcoin maps which show businesses that accept Bitcoins, most of which are in the US.

The majority of cryptocurrency activity still appears to be speculative rather than usage as a currency. If this state of affairs starts to reverse then cryptocurrencies may do well; if not then the whole concept may die like the great South Sea Bubble.

Probably the biggest practical use for cryptocurrencies is in international money transfers where the overheads of credit card fees and currency exchange margins are ridiculously high.

Moving your Bitcoins into normal cash still attracts fees of around 5% including buying and selling, so real savings will only be made if your destination is happy to work with Bitcoin.

Cryptocurrencies are fascinating and the appeal of easy money may grab the imagination. If you still fancy cryptocurrencies then do a lot of homework before spending any serious money because there are serious dangers and you could easily lose money rather than make a profit.

Pj Radcliffe, Senior Lecturer, Electrical and Computer Engineering , RMIT University

This article is republished from The Conversation under a Creative Commons license. Read the original article.