A New Way to Pay

What is digital currency? We take a look at this complicated concept.

Last spring, we asked readers what they were saving for. Most said things like video games and phones. But Tyler, a 9-year-old from Los Angeles, California, said he was saving for a Bitcoin. If you’ve been reading the headlines, you know he’s not alone. Bitcoin is an example of a new type of electronic money called cryptocurrency. There are more than 1,000 cryptocurrencies. Bitcoin is the best-known.

Unlike paper money or coins, crypto (for short) isn’t something you can hold. And it isn’t printed, like dollars, or minted × mint TETRA IMAGES/GETTY IMAGES to make coins (verb) Since 2002, no new half-dollar coins have been minted in the United States. , like quarters. It’s created using computer programs and exists only in computer files. But it works like real money. To spend Bitcoin, you need a digital wallet, which is like a bank account installed on your computer or smartphone. You can use your digital wallet to spend Bitcoin at various websites and stores around the world.

To understand crypto, it helps to know about the history of money. U.S. currency was once backed by “the gold standard.” For every dollar issued, a similar amount of gold was kept in a vault. Today, money has value because the government says it does, and people believe in the government.

Cryptocurrency, too, has value because people believe in it. Users can buy Bitcoin. But they can also get paid in Bitcoin for helping process transactions for others. This involves using computers to perform complex equations and solve math problems.

A Little Like A Library Book

One of the reasons people trust Bitcoin is that there is a traceable record of every transaction. Think about the last time you checked out a library book. There was a record of everyone who had ever checked out that book before you. That’s similar to the record, or ledger, that’s kept for Bitcoin. A technology called blockchain creates a list of the transactions made for each Bitcoin. It uses cryptography, a secret code, to keep transactions secure.

Is it safe?

One reason people got interested in Bitcoin is they saw a way to make a lot of money, fast. In September 2015, a single Bitcoin was worth $230. By December 2017, the price had risen to $17,000. But people lost a lot of money fast, too. The price of one Bitcoin is now about $6,500. Why? It’s like the excitement that increases the price of a popular toy. The price falls once the excitement dies down.

This instability in price is one reason experts say Bitcoin is risky. But many believe that cryptography and blockchain are going to change our world, just like the Internet did. “Thirty years ago, you could send a letter to someone in India, and it would take a month to get there,” says Edward Stringham, an economist. “Today, email allows people to communicate instantly. Cryptocurrency is doing the same thing for money. It’s letting people [around the world] buy and sell with one another, and that’s revolutionary.”

Family Challenge

The difference between paper money and cryptocurrency is similar to the difference between snail mail and email. Talk to your family to find examples of other technologies that have completely changed the way we do something.

—By Kathryn Tuggle

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