Bitcoin is considered a cryptocurrency, a digital form of currency that only exists in electronic form, with no physical banknotes or coins. There are currently about 1,324 different cryptocurrencies around the world, and the list is continually growing. Created in 2009, Bitcoin was the first, and remains the most utilized and well known.
Traditional currencies, such as the U.S. Dollar or Japanese Yen, are considered centralized currencies. Each nation’s central bank, such as the U.S. Federal Reserve, establishes monetary policy and manages the supply of money in their financial system. But cryptocurrencies are decentralized, having no governmental or regulatory control or oversight. The rules, structure, integrity and amount of currency available are solely determined by the creators of each individual currency system. In the realm of cryptocurrencies, there are no restrictions on who can create a form of digital currency.
As the world’s first cryptocurrency, Bitcoin was a way for people to anonymously exchange value with one another, avoiding any governmental or private entity that traditionally serves as a middleman. No bank, credit card company or payment processor, such as PayPal, is used to broker the transaction between buyer and seller. No real-world personal information is used or needed; owners are identified only by a coded internal system address. Cryptography, a hi-tech blend of mathematics and computer science, is used to store, secure and transmit data while maintaining user anonymity.
Still in relative infancy, the number of merchants that accept payment in Bitcoin is limited. However, as Bitcoin and other cryptocurrencies gain global attention, its use is becoming increasingly accepted. Notable companies that currently accept Bitcoin as payment include online retailers Overstock.com and Shopify.com, Microsoft, Dell, Starbucks, online travel sites Expedia.com and Cheapair.com, satellite tv provider Dish Network and the Chicago Sun Times. Other merchants allow Bitcoin but only through the purchase of a store gift card, which can then be used to purchase the store’s goods and services. These stores include Home Depot, Whole Foods, CVS Pharmacy and Walmart.
To access Bitcoin, or other cryptocurrency, requires opening a “wallet,” the nickname given for an online account. Accounts can be opened on numerous online exchanges, which serve as a platform for buying, selling, transferring and storing digital currency. The wallet serves as the digital credentials, or identification, for the account. It is actually a software program that stores encrypted keys allowing users to engage in transactions or monitor their balance. Users can buy fractional shares of the currency in amounts as small as 100 millionth of a Bitcoin.
The key to Bitcoin’s success has been its revolutionary technology. Called “blockchain technology,” it allows digital information to be distributed but not copied. Once a transaction is validated, it is added to a new group, or “block,” of recently accepted transactions. The block is then added to the existing blockchain to form a continual ledger of Bitcoin transactions, in a way that is permanent and unalterable. This blockchain of data stores the complete historical record of Bitcoin transactions, dating to the first in 2009.
For most of their existence, Bitcoin and other cryptocurrencies resided in the shadows of alternative currencies. Though its genesis was to serve as an anonymous digital platform for the exchange of goods and services, it seemed about as popular or trustworthy as the ancient practice of the barter system. However, its obscurity has suddenly been shattered. Its use, applicability and most importantly, rising value, has now gained its largest participant ever — Wall Street.
Bitcoin as an investment is the ultimate gamble. Unregulated by any government, it serves as a modern day Wild West frontier. Marked by massive upward and downward swings in price, it’s been flooded with investors who don’t necessarily know exactly what they are buying, but view its meteoric rise as assurance enough.
In its first few years as a digital currency, the value of a single Bitcoin was less than $0.10. Since then, its value has been on a gradual, yet steady rise. In June 2011, it reached $10. In April 2013, it reached $100 and just seven months later, in November, it passed $1,000. But these impressive gains pale in comparison to the surge in Bitcoin’s value driven by the recent flood of investor cash.
On Thursday, Dec. 7, Bitcoin rose $3,149.03 to close at $16,858.02, a record high. In a span of just 25 days, the price of a single Bitcoin rose by $11,000.70, or 187 percent. Year-to-date, Bitcoin has gained $15,889.79, a massive 1,641 percent increase.
Boasting an astronomical surge in value, it is understandable how Bitcoin has swept the world’s attention. The underscore is simply remarkable. Consider an average person, who in the early years of its inception, puts down $1,000 to buy 1,000 Bitcoins at a buck a piece, simply as a novel and cool way to buy pizza and video games. At today’s prices — now hold onto your socks — those Bitcoins are now worth more than $16 million!
Bitcoin has raised a number of serious issues related to the world of cryptocurrencies. Too many for a single article. The anonymity it provides for illegal/illicit transactions, lack of regulation, security, technological innovations and the legitimacy it gains from the financial markets, are topics of concern and debate. In the upcoming weeks I’ll be analyzing those subjects. Is there an aspect of Bitcoin or cryptocurrencies you’d like to know more about? Send your request for Bitcoin-related topics to me at email@example.com.