You may have heard of Bitcoin and Ethereum. If not don't worry, they are two types of digital currencies and have been introduced as a secure and anonymous way of making payments.
They are designed to take over from traditional currencies like the US and Australian dollars. No need to carry notes or cash around when everything can be done digitally.
At the current exchange rate, one Bitcoin is equal to $3,161 Australian dollars. But the prices of Bitcoin and Ethereum, in particular, can be volatile. Receiving a payment of say Bitcoin on a certain day for a product might mean that you have undercharged the real cash value of your product.
Earlier this week, Bitcoin fell by more than 10% to below US$2,500, but also fell to US$2,276 last Thursday. In 2011, Bitcoin lost 90% of its value in just five months.
However, they have proven to not be as safe or anonymous as they were meant to be. They also have several other negative aspects.
A Russian man suspected to be behind the laundering of at least US$4 billion was arrested in Greece yesterday. Bitcoins are the primary currency of the so-called dark web, where users sell illegal items such as credit card details, drugs, malware and other things like instructions to print 3D gun parts.
Some Bitcoin and Ethereum exchanges and wallets have also been hacked and robbed of millions of dollars worth of Bitcoin. If you buy Bitcoins, you'll need a digital wallet to store them in.
Bitcoin is currently worth US$2,534.93, while Ethereum is worth US$197.75 each.
The major problem for someone who wants to buy digital currency is what you are going to buy with it. Not many retailers or websites accept payment in Bitcoin yet, and it remains to be seen whether more merchants will adopt a digital currency and which one.
Holding Bitcoin or Ethereum in your digital wallet is also fraught with danger. Due to volatility, the value of a crypto currency could halve or fall even further in no time, but sure it could rise too. Your wallet could also be hacked and you'd lose all your Bitcoins.
Foolish takeaway
If you must speculate on digital currencies make sure you are fully-conversant with the pitfalls and disadvantages. It doesn't seem to be a smart way to get rich, but rather an easy way to hand your cash to someone else for free.
