The earliest and most valuable digital cryptocurrency has been in the news recently, owing to its meteoric all-time high of $68,521 on November 5, 2021, before its sudden and temporary crash to below $60,000 on November 16 th. But there’s a lot more to Bitcoin than just its price fluctuations.
A whitepaper written under the pseudonym ‘Satoshi Nakamoto’ was published in 2008: with it, Bitcoin was born. While Nakamoto’s identity is shrouded in mystery, his goal was to create “a new digital financial system” that was “completely autonomous, with no database or strong government.” Bitcoin officially launched on January 3rd, 2009. After developing the concept and technology, Nakamoto revealed the code base and subdomains to other members of the Bitcoin community and then vanished.
Bitcoin is a digital currency with a finite supply of 21 million coins. Using cryptography to keep it secure, there are no physical coins. Instead, Bitcoin is created, stored, and distributed through the use of a decentralized ledger system (a blockchain). Being decentralized means that it is not governed by any financial organizations or institutions like commercial banks or brokerage firms. Bitcoin is “mined” by powerful computers.
Bitcoin can be bought and sold using a digital mining process. This process involves using an algorithm to discover each new block’s distinctive string of numbers and letters. Each block unlocks a certain amount of Bitcoin. Miners will use special computers called nodes to search for the codes – it’s the equivalent of thousands of archeologists searching for a relic, with only the first one to find it receiving payment! Mining is an energy-intensive process with astronomical energy costs. In fact, Bitcoin’s mining process uses more electricity annually than the whole of Argentina. When the code is discovered, whoever finds the block can then create the next block. As Ollie Leech, Learn Editor at CoinDesk describes, “each new block has a treasure chest. And inside is a block reward which is free Bitcoin that enters the market.”
Bitcoin’s availability diminishes over time: every four years the number of coins entering circulation is halved.
The value of Bitcoin is ultimately determined by how much people are willing to pay for it. The definition of value is, of course, subject to interpretation in the absence of a government or central body in charge of supply. The value of Bitcoin can be compared, to a point, with the value of special metals: both are limited in quantity. Only 21 million Bitcoins can ever be produced. So far, as of August 2021, over 18.77 million Bitcoins have been mined. The process of “price discovery,” the fundamental determiner of Bitcoin’s price volatility, also fosters speculation and manipulation.
Bitcoin has generated a slew of multi-millionaires. According to Fortune, the Winklevoss twins turned a $65 million Facebook windfall into a venture capital fund that made early Bitcoin bets. The twins, needless to say, are now billionaires.
If you’re willing to take on the risk, there are a growing number of digital currency exchanges where you can buy, sell, and store Bitcoin. With Coinbase, for example, you may deposit funds into a virtual wallet from your bank or PayPal account. Once your account has been verified, you may then trade fiat cash for Bitcoin.
More than 100,000 businesses accept Bitcoin. It’s worth noting that Bitcoin has no built-in transaction fees, however certain exchanges, like Coinbase, do charge a fee for purchasing and selling.
The short answer is yes. For the time being. And as long as you don’t do anything unlawful with it. When the FBI shut down Silk Road, a Dark Web marketplace for drugs and other illegal products and services, Bitcoin was the only currency accepted.
Bitcoin has generally eluded regulation in the United States, though it’s becoming increasingly scrutinized as it grows in use. Though buying and selling Bitcoin is technically legal, miners and exchanges operate in a murky area that might be subject to future regulation and/or law enforcement action.
Other than the legal and regulatory risks, Bitcoin is a dangerous investment. When you wake up in the morning, you know exactly what a dollar will buy you. The value of a Bitcoin, on the other hand, is extremely volatile, fluctuating considerably from day to day and even hour to hour.
Because Bitcoin is relatively young and decentralized, it is riddled with ambiguity and unknowns. Even mining’s technical rules are still in flux and subject to controversy.
Bitcoin transactions cannot be traced back to specific users since they’re encrypted using public and private keys. The anonymity can be enticing, especially as firms and marketers become more invested in tracking our transactions. But be careful: you can never be sure who is selling or purchasing Bitcoins from you. Money laundering opportunities are rife.
Theft is also a possibility. In 2014, Mt. Gox “lost” 750,000 of its clients’ Bitcoins, and in December 2017, hackers stole $60 million from NiceHash. There are rarely options for requesting refunds, disputing transactions, or recouping damages. A transaction is final once it reaches the blockchain.
The IRS considers Bitcoin to be property rather than cash. This has tax implications: a federal judge recently determined that Coinbase must hand over documents to the IRS for transactions worth over $20,000.
Then there’s the matter of trust. Even the most well-known exchange, Coinbase, has battled to keep up with demand, suffering from site outages, scalability challenges, and customer support concerns.
Groups within the Bitcoin mining community clashed in August 2017 regarding the regulations that control the mining process, diverging especially on the issue of what constitutes an adequate block size (in megabytes). Due to a lack of consensus, a fork in the blockchain occurred, with those who wanted increased block size founding Bitcoin Cash.
Despite having a common digital ancestor, Bitcoin and Bitcoin Cash each have their own blockchain with distinct protocols. (Bitcoin miners utilize 1MB blocks, for example, whereas Bitcoin Cash miners use blocks of 8MB.) It’s almost certain that forking will happen again in the near future.