Right now, July 18, 2021 at 2:52pm, one Bitcoin is valued at 31,709.90 USD.
Some believe that Bitcoin (aka BTC) will be the future of currency, ultimately replacing all government currencies. Others are skeptical of the coded coins, their intangibility, and potential to be hacked. Some of us do not understand Bitcoin enough to come to a conclusion. In this article, I hope to give you an overview of the currency and help you better understand this popular currency, because, whether we like it or not, digital currencies may become the future.
First, let’s talk about currency. Currency is essentially the ‘money’ or valuable items in circulation in a society. The currency can be traded or exchanged to purchase goods. Traditionally, currency consisted of intrinsically valuable materials like precious metals, rare shells and stones or even commodities like food and cloth. Eventually, paper money came to replace traditional coins and shells. These days, currency is circulated
electronically in the form of credit and debit card transactions. Banks and financial institutions store our transactions in their records or ‘ledgers.’ A ledger is just a book or list where business transactions are recorded (more on that later). Since paper is not a valuable material, it had to be assigned a value. Paper money (also called ‘fiat money’ when supplied by a government) has value because people believe it has value and businesses accept money in exchange for goods. From that idea grew digital currency and cryptocurrency, because, even though it isn’t physical, it can be assigned value. A seller will accept your Bitcoins in exchange for pizza, and can be valued against other currencies, thus allowing Bitcoin to become a currency.
Bitcoin is called a digital currency, or crypto-currency. It was created in 2009 based on the system outlined in Satoshi Nakamoto’s whitepaper (Satoshi Nakamoto is thought to be a pseudonym for the real creator, who remains anonymous). Bitcoin is decentralized, meaning it is not linked to any government or bank. It is also intangible, because there are no physical coins. Bitcoin transactions are instead stored in blockchain, which can be thought of as a virtual ledger. The blockchain stores all the transactions and trades made with bitcoin, as well as the balance of each address (these addresses are created when a user wants to send Bitcoin, according to the Bitcoin website, they should only be used once). The blockchain is also publicly available to all users, which helps prevent bad actors from cheating the system. Some Bitcoin users choose to become “miners” or “nodes” of the currency. “Nodes” are individuals or companies who run the Bitcoin code on their computers and store the blockchain. These people verify the accuracy of Bitcoin transactions, make sure the coins are not being duplicated, and add new blocks to the blockchain. The “blocks” are, to put it simply, clusters of Bitcoin transactions. “Miners” are specific nodes that participate in Bitcoin mining.
Bitcoin mining is the process by which new Bitcoins are released and blocks (transactions) are added to the blockchain. It takes about ten minutes to create a new Bitcoin block by processing a transaction, but finding coins is more complicated. Miners use powerful computers to solve complex computational problems and puzzles to release new Bitcoins into circulation and add blocks to the blockchain. However, there are only 21 million Bitcoins that can be mined in total, and they are getting more and more difficult to discover. Think of ‘Bitcoin mining’ as an analogy for real mining. The more gold you mine, the more rare it gets, and the harder it is to find.
As of June 27, 2021, there are already 18.74 billion Bitcoins in existence (so there are only about 3 million left to be mined). The cap on the number of coins is how Bitcoin ensures the currency does not suffer from devaluation (because the currency supply cannot be inflated). Nonetheless, most Bitcoin users do not mine their own coins (tokens), but buy and sell Bitcoins in online exchanges.
Bitcoin users have both a public and a private key. The “keys” are long lists of numbers and letters generated by a computer algorithm. A user’s public key can be viewed by anyone (comparable to a bank account number) and is the address where others can send Bitcoin. A user’s private key is more like an ATM PIN, because it’s used to authorize transactions and should be kept private. Bitcoin users also receive a digital wallet, which is used to store and track bitcoin tokens. The wallets are installed in the cloud, or on the owner’s computer.
Even though Bitcoin’s digital system sounds well-planned out, the risks associated with the currency are very real and may hinder its future success. Bitcoin’s digital exchanges (where Bitcoins are bought and sold) are prone to hacking, malware and technical glitches. Hackers may try to gain access to bitcoin wallets and steal private keys to transfer stolen bitcoin to their accounts. Additionally, all bitcoin transactions are permanent and irreversible (much like paying with cash). And, there are limited sources of protection or insurance if something goes wrong.
Some governments have even chosen to restrict the use of bitcoin (or make it fully illegal) because of the associated risks, how difficult it is to regulate and the fact that it rivals the government currency. Bitcoin allows its users to be anonymous (transactions and addresses are recorded in the blockchain, but names are not). As such, the currency is often used to make black market deals, facilitate tax evasion and money laundering, purchase drugs, and other illicit activities. Bitcoin also poses a threat for investors, given that it is notorious for fluctuating in value and competition in the crypto-currency market is growing. For example, the price of Bitcoin fell by 61% in one day during 2013.
Despite the risks, many people--from teenage-millionaire bitcoin traders to
Elon Musk, to Mark Cuban, to El Salvador's bitcoin beach--have embraced the crypto-currency. Not to mention, tons of startups like Dogecoin, Litecoin, Ethereum, and Ripple have followed in Bitcoin’s footsteps and created their own digital currencies (called altcoins). It will be interesting to see which of these currencies prevail, because it seems like the concept of virtual currency is not going away anytime soon.
Here at The Margazine we are committed to posting high-quality, unbiased and accurate content and are open to constructive criticism. If anyone who follows Bitcoin closely notices any technical issues with this post (how Bitcoin works, blockchain, etc.) please email alexis.lindenfelser@smes.org.
Sources:
Check out this link for live updates to the value of Bitcoin: https://www.coinbase.com/price/bitcoin
Check out this link for a list of all the cryptocurrencies and their values: https://coinmarketcap.com/all/views/all/
Check out this link for more information on how currency works:
Check out this link for more information on fiat money:
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