THE BITCOIN – The fact that a currency that most financial watchdogs said will sink in late 2017, refused to do so, only made it seem like a messiah for investors willing to take the risk. The entire crypto currency market is now valued at 216 billion USD and the bitcoin market alone makes up 53% out of that, Bitcoin surged 20x last year and hit a peak of almost $20,000, and dropped to USD 6700 in value recently. It hit an all-time high of more than $800 billion in early January, before falling dramatically as a result of a huge cryptocurrency sell-off.
Surprisingly enough though, no one knows the exact reason(s) why it was soaring. Some attribute it to signs that the Chinese government could reopen bitcoin trading. Some say it is the volatility of the entire market following events like Brexit and traditional economies struggling with sluggish growth. The Catalonian Independence Movement might also have had a bearing on how Bitcoin prices have been affected. Lastly, government maneuvers like demonetization that are eroding the value of traditional currencies could also be playing its part in the minds of investors.
Various financial organizations and world leaders have criticized Bitcoin and other crypto currencies for being an inaccurate representation of value. Some have gone so far to call Bitcoin a fraud. It might be impossibly difficult to know why the bitcoin is as successful as it is, but it’s easy to understand why people in power have a dislike for it; it threatens the traditional power structure. Not being centrally controlled by any one entity ensures that it is a just currency that is entirely dependent on market demand and supply. As such it takes power out of the hands of financial institutions and puts it into the consumer’s hands.
Bitcoin is a form of digital currency, created and held electronically. No single authority controls it. They aren’t printed. Bitcoins are produced by people and increasingly companies, using computers all around the world that solve mathematical problems, and are in return awarded bitcoins.
Bitcoins can be used electronically to make purchases like traditional currencies. However, the most important factor that sets bitcoin apart is the fact that it’s decentralized. This puts all of the people involved at ease as no large bank controls their money and no one can tell you that your money is demonetized overnight.
A software developer under the pseudonym of Satoshi Nakamoto is credited with inventing bitcoins, which was originally an electronic payment method based on mathematical proof. The idea was to produce a currency independent of any central authority, transferable electronically with very low transaction fees.
Since no banks are involved in creating the currency, they just cannot create more of it to cover their national debt, thus being unable to devalue the currency. Instead bitcoins are created digitally by a group of people that anyone can join. The process of generating bitcoins is called mining and is done using computing power on a distributed network. The network itself processes transactions made with the virtual currency, effectively making bitcoin its own payment network.
The bitcoin protocol says that there can only be 21 million bitcoins in the world. To ensure that is the case, bitcoin mining gets more difficult with time. In a couple of years, you would need double the resources to effectively mine the same number of bitcoins as you do today.
You’d be wondering as to where you can use it and that’s a legitimate question to have, however, the use of bitcoin purely for investment purposes has seen an exponential growth among investors.
Are there risks involved? Certainly. Something that multiplies 20x in a year would expectedly carry some downside as well and the potential risks are easy to understand. Being something that is entirely driven by demand, a sudden fall in demand can bring down the value multi-fold.
The use of bitcoin as currency is not that unusual as readers might believe. This writer, on a recent rendezvous with software developers and other members of the start-up ecosystem from around the world, was in for a shock when he was told that he could make payments for the hotel room that he was sharing—in bitcoin. However, what was more surprising was the fact that these young entrepreneurs refused to pay the writer in bitcoin, further demonstrating how valuable the currency was for them.
In a world where Facebook probably has a bigger impact than any world leader; in a world where increasingly, geeks are the new jocks, I think I’d rather take the geeks’ penchant for bitcoin as a sign of things to come.