Most of you will have seen Bitcoin and Cryptocurrency headlines in the mainstream media popping up more frequently in the last few months. We have fielded several questions from clients asking if Bitcoin is a good investment.
Personally, I have been following Bitcoin since 2010, and have been keeping a keen eye on how it develops. Over the next few months, we intend to put out several posts on the theory, utility, practicality, and likely impact of Bitcoin and cryptocurrencies. We will also discuss our take on the social and political ramifications of such a technology.
In 2009, the term cryptocurrency was used for the first time. It was in reference to the cryptocurrency most people have heard of Bitcoin. Bitcoin was created by a pseudonymous author who goes by the name Satoshi Nakamoto.
Since 2009, cryptocurrencies have seen exponential growth in market size and popularity. Going back to July of 2010 Bitcoin could be bought for $0.086 USD. At its peak in mid-December of 2017, the price was $19,345.49 USD. That is an astounding growth of 2,254,947% over a 7.5 year period.
Well now that we know Bitcoin is worth a lot, but what is “Bitcoin” and why is it so valuable?
This is exactly what we are going to try and answer in our Bitcoin blog series. Each post will be on a different topic, with increasing complexity. For this first article, we are going to answer some basic questions, to help generate a better understanding.
What is a Bitcoin?
A “Bitcoin” is a string of cryptographic code. Cryptography can be defined as the transmission of encrypted communications, anonymously validated by a third party overseer.
A list of “coins” and their beneficial owners are posted on a public ledger for all to see, with copies replicated on tens of thousands of computers around the world. This “public ledger” is what we call the block-chain.
Where does it get its value from?
Part of the value of a bitcoin is based on its scarcity. There is a limited amount of bitcoin, just like there is a limited amount of gold. Bitcoin is mathematically finite. There can only ever be 21,000,000 in existence. You cannot print or generate new bitcoins to add to the supply.
The value of block-chain as a whole comes from its potential future implications. There is huge potential behind block-chain technology to revolutionize the financial sector and how we transfer value(or money) between one another. Block-chain is also likely to affect other industries and established ways of transferring private property registration between two parties.
How are they produced & transmitted?
The Bitcoin formula has 21 Million possible cryptographic combinations. When Bitcoin was first launched, tech-savvy computer people set up their computers to solve the cryptographic puzzles on the Bitcoin block-chain ledger. These computers were called miners – they were exchanging electronic work for the unlocking of a Bitcoin. Much like a gold miner would dig gold out of the ground.
Each time a Bitcoin puzzle was solved the miner was rewarded with that coin. As coins were solved they were allocated to the miner’s wallet, where he could then trade them with other individuals, creating some liquidity in the bitcoin market.
As Bitcoin grew in popularity more people set up computers to mine bitcoin. This created a network of computer terminals available to do electronic computing work. This was very important.
In addition to mining, every time a Bitcoin transaction is processed, it is transmitted to the Bitcoin network of computer terminals where each miner races to re-hash the string of code, validate it, make an entry on the public ledger, and send it to the receiving party’s wallet. For this, the miner is incentivized with a small fee from each transaction they process.
So, once all of the original 21 million Bitcoins are solved and accessible on the market, Bitcoin miners can still earn Bitcoin by processing bitcoin transactions.
Why is there a limited amount?
There is a limited amount of Bitcoin because the mathematical formula is finite. There are only 21 million different combinations of cryptographic code present. A new code introduced into the system doesn’t abide by the original algorithm and is discarded as an invalid transaction.
Who controls Bitcoin?
Bitcoin is completely decentralized, therefore it is not managed by any government, country, or bank. Bitcoin is completely peer-to-peer and is governed by the consensus validation of a mathematical formula on tens of thousands of computers around the world simultaneously.
Can they be destroyed?
They cannot be destroyed since they are not physical in nature. However, they can be lost. One way that this can happen is if you forget or lose the access key for your bitcoin wallet.
You can think of a bitcoin wallet as an accounting ledger that is housed in an app on your smartphone or computer. Insert your key and your wallet will pull information from the public ledger stored on the internet and populate your wallet with its balance.
How do I obtain Bitcoins?
There are a couple of ways to obtain a Bitcoin. You can set up a mining rig and mine for them, or you can purchase them. The most common way is by purchasing through an online Bitcoin exchange, or through a Bitcoin ATM where you trade dollars for Bitcoin.
How do I store and protect them?
You store and protect them in the same general way you do any other money: In a wallet or a safe. But since Bitcoins are not physical items like a dollar bill or loonie, you have to store them in a digital “wallet” or digital “safe”.
We will provide more cryptocurrency information in future blog posts.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy.