Digital currency is a newsy subject that divides the world into three groups. One group that thinks digital currency is an avant-garde idea whose time is ripe. Another group that believes digital currency is a passing fad. Then there is the multitude in the middle that’s unsure what digital currency is, unlikely to have a solid opinion on its viability.
Created and managed through the use of a technique known as cryptography, Bitcoin is the most popular of the digital currencies, also known as cryptocurrencies. All transactions for Bitcoins and other digital currencies take place online.
Bitcoins are created digitally through a computer-generated process known as “mining”. Mining requires powerful computers to solve complex algorithms and crunching of numbers.
One of the greatest advantages of cryptocurrency is that, unlike conventional money, it is not a property of any country or region like the dollar is to the US or euro to Europe.
One can send and receive Bitcoins or any other cryptocurrency from anywhere in the world, as long as they have access to an internet connection. No exchange rate fee is charged for cross-border transactions and users can remain anonymous.
While these currencies are welcomed in many parts of the world, a few countries are wary of them because of their volatility and their perceived threat to conventional monetary systems. The fact that users can remain anonymous does not sit well with many governments.
They are concerned that digital currencies can be used to bankroll illicit activities like drug trafficking and money laundering.
Most countries have no clear-cut rules or laws governing cryptocurrencies. Instead, they prefer to take a wait-and-see approach.
In Africa, for example, cryptocurrencies — Bitcoin, Dash and Lisk — though not endorsed by respective governments — are used by some businesses in Botswana, Ghana, Kenya, Nigeria, South Africa and Zimbabwe.
Kenya's Central Bank has banned banks from dealing in virtual currencies, but the ban has not deterred some businesses from transacting in digital currencies.
In China, Bitcoin is barred: It’s against the law for banks and other financial institutions to deal in digital currencies.
So, will these alternative currencies eventually tip the scales and become as ubiquitous as the dollar and the euro? Or are cryptocurrencies a passing fad that will fade away soon?
Economic pundits predict that a big change in crypto is imminent. They say in a few years, there is the possibility that digital currencies will be floated on major stock markets, thereby, injecting additional credibility to the currency.
Some of the limitations that cryptocurrencies currently face — such as the possibility of one’s digital fortune being erased by a hacker — though not insuperable, remain a deterrent to would-be investors.
With these potential problems and promises, risk-averse investors may want to approach investments in digital currency with the wisdom of a carpenter — measure twice, cut once. That is, with caution.
Mr Wambugu is an informatician. Email: [email protected] Twitter: @samwambugu2