What is Bitcoin? | Digital Gold or ‘worth nothing’?
Like it or not, you can’t help but pay attention to Bitcoin. An entire industry has been built from how it promises to change the way we interact with finances, along with endless memes and hype.
You might have also heard stories like someone trading 10,000 Bitcoin for two pizzas in 2010, which would have been worth more than $640m at one point. At the same time, famous investors like Warren Buffet refuse to participate in trading Bitcoin at all.
So is Bitcoin really digital gold, or worth nothing? And more importantly, why do we need it?
What is Bitcoin? And what makes it so special?
Launched in 2009, Bitcoin was the first cryptocurrency to be created. It deviated from conventional payment networks, and is still the most common and prominent example of a payment channel using blockchain technology.
Bitcoin is valuable in some people’s eyes due to three key features;
Bitcoin is a digital or virtual currency, where all value is stored electronically. Removing physical cash or cheques means that it’s almost impossible to create fake or counterfeit money, or double-count transactions. Advantages of digital currencies can be that they are faster and easier to use, however they also have the potential to be hacked.
Many digital currencies run on decentralised or blockchain technology, meaning it is not controlled by one single person or company. Instead, they are run by a network of thousands of computers around the world. The blockchain is made up of sets of transactions or ‘blocks’ that are connected on the ‘chain’. Blockchain technology allows transactions to be recorded and verified in order, so they cannot be reversed, or tampered with. By using blockchain technology, a decentralised currency like Bitcoin can create more transparency, traceability, and trust.
There is a limited supply of Bitcoin built into its algorithm — 21 million coins to be exact. As of July 2022, over 19 million coins have been created, and new coins have to be created through ‘mining’. Similar to how physical gold has a finite supply to be mined, the scarcity of Bitcoin is how it got its reputation as ‘digital gold’.
How is Bitcoin created or ‘mined’?
The only way to create more Bitcoin, validate transactions and add data to the blockchain, is through validation and mining.
When new blockchain transactions are made, they’re sent to a ‘memory pool’ — think of these as pending transactions. These transactions need to be validated, to prove there’s no double-counting, before a validated record or ‘block’ can be added to the blockchain.
To complete the validation process, miners bring together unconfirmed transactions from the memory pool, to create a potential block. They then use computing power to solve a complex cryptographic problem to try convert this into a validated block. The Proof of Work algorithm that Bitcoin, and now most cryptocurrencies use, is a proven process for creating a shared understanding of validated transactions across the network.
Mining takes significant computing power, so as an incentive, there is a reward for whoever proposes a valid block. This includes transaction fees, and a ‘fresh’ supply of newly-mined Bitcoin being added to the total pile. This process adds to Bitcoin’s unique value as a scarce and highly-verifiable currency, especially in comparison to traditional financial and asset systems.
Why do people and institutions buy Bitcoin?
There are now thousands of cryptocurrencies, but we’ve still seen headlines of companies like Tesla, Square and MicroStrategy buying millions of dollars of Bitcoin. But why?
We mentioned there’ll only ever be 21 million Bitcoin created — its scarcity is why it keeps making headlines, and has its reputation as digital gold. Fixed-supply, combined with increasing demand is core to how Bitcoin has increased in value over the past decade.
Like traditional investors, crypto enthusiasts will also tell you that a well-diversified investment portfolio can help achieve your investment goals according to your risk appetite. Bitcoin and Ethereum typically form a large part of people’s investment portfolios, in combination with some less-established coins or meme coins. As a relatively new asset class, investing in established coins can provide stability, whilst still providing exposure to crypto for individuals and institutions.
Finally, there’s a widely-held belief that Bitcoin is outside of the reach of the government, regulation, and inflation. Its scarce and decentralised nature, in contrast with traditional money that can be printed by governments, means Bitcoin is seen as a hedge against inflation. As consumer prices rise and traditional currency values drop, Bitcoin’s price should technically rise and hold over time. Only time will tell if this holds true, with the high volatility recently experienced by both global stock and crypto markets.
So, digital gold that will continue to rise in value, or is worth nothing more than a few pizzas? We’ll let you make up your mind about the first cryptocurrency ever created.
In case you’re interested…
Bitcoin might not be new-news in the world of cryptocurrencies, but there’s constantly new trends and interesting developments.
Is Bitcoin a bubble? Its decentralised and deregulated nature means its value is driven by supply, demand, other cryptocurrencies, and how much risk people are willing to take. So is Bitcoin’s value even real? Read more.
How will Bitcoin be embraced or shunned? El Salvador recently made Bitcoin a national currency and bought 2,300 coins. Why are some countries making the gamble, and others banning it completely? Read more.
Bitcoin mining consumes more energy than entire countries. Remember mining? The process is extremely energy consuming — and can consume more than entire countries like Denmark or Finland in a year. How are we developing new ways to mine more efficiently, and are they working? Read more.
Bitcoin ETFs can now be bought and traded in traditional markets. They give access to people who want to invest in crypto, without having to actually own them. So are Bitcoin ETFs better than owning the real thing? Read more.
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