What is Bitcoin?
Bitcoin is a digital asset created by a distributed peer-to-peer network. It is a peer-to-peer, decentralised, cryptographic digital currency that works without a central authority.
No one controls it, there is no single point of failure, and everyone on the network is equal. Bitcoin (BTC) is a new kind of digital currency with cryptographic keys decentralised to a network of computers used by users and miners worldwide. A single organisation or government does not control it. It is the first digital cryptocurrency that has gained the public’s attention and is accepted by many merchants.
Like other treaties, users can use digital currency to buy goods and services online and in some physical stores that accept it as a form of payment. Currency traders can also trade Bitcoins in Bitcoin exchanges.
Differences between Bitcoin and Traditional Currencies
There are several significant differences between Bitcoin and traditional currencies (e.g. US dollar):
- Bitcoin does not have a centralised authority or clearinghouse. No government or financial institution has control over Bitcoins. Users and miners around the world manage the peer-to-peer payment network. The currency is anonymously transferred directly between users through the internet without going through a clearinghouse. This means that transaction fees are much lower.
- Bitcoin is created through a process called “Bitcoin mining”. Miners worldwide use mining software and computers to solve complex bitcoin algorithms and approve Bitcoin transactions. They are awarded transaction fees and new bitcoins are generated from solving Bitcoin algorithms.
- There is a limited amount of Bitcoins in circulation. According to Blockchain, there were about 17.3 million Bitcoins in circulation as of April 2020, and only 21 million could ever exist. The difficulty of mining Bitcoins (solve algorithms) becomes more challenging as more Bitcoins are generated, and the maximum amount in circulation is capped at 21 million. The limit will not be reached until approximately the year 2140. This makes Bitcoins more valuable as more people use them.
- A public ledger called ‘Blockchain’ records all Bitcoin transactions and shows each Bitcoin owner’s respective holdings. Anyone can access the public ledger to verify transactions. This makes the digital currency more transparent and predictable. More importantly, transparency prevails over fraud and double spending of the same Bitcoins.
- The digital currency can be acquired through Bitcoin mining or Bitcoin exchanges.
- A limited number of merchants accept digital currency on the web and in some brick-and-mortar retailers.
- Bitcoin wallets (similar to PayPal accounts) are used to store Bitcoins, private keys and public addresses and anonymously transfer Bitcoins between users.
- Bitcoins are not insured and are not protected by government agencies. Here, they can not be recovered if the secret keys are stolen by a hacker or lost to a failed hard drive or due to the closure of a Bitcoin exchange. If the secret keys are lost, the associated Bitcoins can not be recovered and would be out of circulation.
I believe that Bitcoin will gain more acceptance from the public because users can remain anonymous while buying goods and services online, transaction fees are much lower than credit card payment networks.
The public ledger is accessible by anyone, which can be used to prevent fraud; The currency supply is capped at 21 million, and the payment network is operated by users and miners instead of a central authority.
Is investment in Bitcoins Good and Safe?
Bitcoin has been a high-risk, high-reward investment until now. Starting at $13 in 2013, the price of one Bitcoin (BTC) hit an all-time high in 2021, with prices above 65,000 USD for the first time in February 2021, April 2021, and November 2021, respectively. Again, when writing this article on 25 July 2022, it was trading at around 21,889 USD per BTC. Imagine how volatile Bitcoin has been.
Bitcoin investors are generally insensitive to price volatility and unlikely to exit their positions, barring some dire eventuality. The current price rally is driven by institutional investors, who view Bitcoin as a hedge against macroeconomic uncertainty. The result is that even if individuals don’t invest in Bitcoin, their retirement funds, insurance companies, and pension funds might be. This institutional investment is a key driver of the current Bitcoin price rally.
Bitcoin will likely gain more public acceptance over time. Still, its price is highly volatile and very sensitive to news-such as government regulations, and restrictions that could negatively affect the currency.