What is Bitcoin?Put simply, Bitcoin is a digital currency. It was developed in 2009 to allow peer-to-peer transactions to occur without a third party like a bank or government to oversee and regulate them. Bitcoin works much like traditional or “fiat” currencies; people exchange Bitcoins for goods and services. However, unlike fiat currencies, which are tied to national economies, Bitcoin is not linked to any specific person, entity, or even geographic location. Blockchain TechnologyUnlike paper money, virtual money is intangible. In the past, this meant that it was relatively easy to copy it to spend the same virtual money twice or to trick someone by sending a payment and then quickly “undoing” it and taking back the money that was spent.
Cryptocurrencies, including Bitcoin, combat this issue by using what is called “blockchain” technology. A blockchain is essentially a public ledger or record of transactions. A “block” is a transaction record, and as new transactions are added, they become part of a linked chain of blocks: a “blockchain.” Whenever a Bitcoin transaction is made, it is instantly recorded and timestamped not only locally but on thousands of other devices. Multiple systems simultaneously confirm each transaction, making the leger practically invulnerable to hacking and errors.
Because it is instantly visible to everyone, each transaction is permanent, and that Bitcoin can’t be spent again the same way, for example, one dollar bill can’t be given to two different people at the same time. Why does blockchain matter?Because the regulation of Bitcoin is outsourced to everyone, instead of one central authority, bitcoin can function as an independent currency without any governmental or institutional oversight. Just as the internet allows information to flow freely without the mediation of newspapers or printing presses, blockchain allows money to be exchanged without any middle-men like banks or credit card companies.
However, it still behaves as a digital item in other ways. For example, it is possible to trade very small fractions of a bitcoin in a way that is not possible for, say, the dollar. It can also enable people to conduct transactions instantly, with little administrative cost, and from thousands of miles away. It can also be more anonymous than other forms of digital currency. When you own Bitcoin, you essentially act as your own bank or ATM, and no one else can see how much you have (unless you get hacked!). Transactions and the “flow” of Bitcoin can, however, be seen by anyone who accesses that online ledger. Why is it so popular?Bitcoin offers transparency, independence from local economic conditions, secure transactions, and a level of anonymity not found with other currencies. Because it also offers a very low-cost way to conduct transactions, some believe that it or other cryptocurrencies may replace cash, central banks and even regional monetary authorities in the not-so-distant future.
Global political and economic instability also contribute to the success of decentralized currencies like bitcoin. Because it is not attached to the success of any one local economy, bitcoin is protected from events like war and government seizure of assets. There is some evidence that people in locations with rampant inflation and instability, such as Venezuela, have already turned to using cryptocurrency. As it grows in trust and reach, it is conceivable that small countries might even adopt it as a national currency. Globally, bitcoin transactions have already topped 1.5 billion dollars, and the value of a single bitcoin has doubled hundreds of times in the past five years alone. In addition to its use value, Bitcoin trades as a finite resource. Like other resources which must be “mined,” bitcoin’s value is a function of its popularity and rarity.
It becomes mathematically more difficult to mine Bitcoin over time. As the number of available coins decreases and the number of people interested in investing in it and using it increases, the value of each Bitcoin increases in response. The more people trust it as a currency and want to use it, the more it will be worth. What will happen with Bitcoin? Is it a bubble waiting to burst?Because of its sheer newness, it’s hard to know exactly how blockchain will impact market systems and mature over time, especially as new cryptocurrencies are developed to compete with it. At its core, Bitcoin was an experiment in blockchain technology designed to test whether a cryptocurrency which could be traded like a fiat currency could be created.
Its current value and popularity is likely due to the media and investor attention it has recently received. Compared to other cryptocurrencies, Bitcoin has a number of downsides. Each transaction adds to the amount of data in the chain; as this becomes longer, transaction times become slower.
Bitcoin can currently only support a few transactions per second, which is thousands of times slower than credit card companies can process transactions. During times of peak trading, it might take hours of waiting to trade Bitcoins. The real issue is that people have been speculating on Bitcoin and buying it just to do so.
If no one is actually using it as a currency, this will be unsustainable. Even as the value of a single Bitcoin nearly hit 20,000 at the end of 2017, it is already decreasing rapidly. However, the technology itself works, and is here to stay, with thousands of new cryptocurrencies springing up each year. If Bitcoin retains its functional value as a currency, it will likely stick around as well.