Did you know that there is a cryptocurrency called Bitcoin and that its price has reached $1700 while the price of gold is only $1230 (as of 14:45 GMT 15/05/2017)?
The Internet Currency
Bitcoin is a cryptocurrency and a digital payment system invented by an unknown programmer (or group of programmers) under the name Satoshi Nakamoto, although much speculation still surrounds its origin. It is similar to the US Dollar, the Euro and other currencies, but the difference is that bitcoin is not a real* currency, and transactions take place on the internet with no physical money exchanging hands. Bitcoin is a crypto currency, that means that you can’t trace the buy & sell transactions or even identify the currency’s owner. To make it easier, let us take this simple example.
*Debate around bitcoin being real money continues, with official ruling being both against and in favor of the notion. Japan became the first country to recognize bitcoin as legal tender in April, 2017.
How Bitcoin Works
Imagine a room with cameras monitoring each movement and recording it. Inside this room there are 5 transparent piggy banks that allow you to see the coins inside them clearly, and each one of them is owned by someone who is standing outside the room and he has the secret code to open it. Once he wants to buy anything he will go to the merchant and give him the code. This merchant will enter the room with a covered face and take the money from a piggy bank and put it in one related to him that is located in the same room. The cameras have recorded that a certain amount was transferred from one piggy bank to another, without knowing the owner and to whom it was transferred.
But Why Bitcoin?
Everything has its pros and cons, the pros can be summarized in three main points:
Lower transaction costs and fast execution
Instead of the need for a third party to transfer money between you and the recipient, knowing that this broker will charge you with fees, bitcoin makes it free of charge. This is due to this factor: the currency itself has not transferred, instead the currency code is the one that was transferred from your bitcoin wallet to another wallet. This transaction between you and the merchant is called P2P or peer to peer.
Your trade can’t be controlled or interfered with. This is a positive aspect for those who like privacy and it also reduces government and bank control over the currency.
Bitcoin is not related to any specific geographical location; you can trade with it as if it is your local currency anywhere in the world. The most important thing is that there are no central banks to control bitcoin which can sometimes cause inflation and artificial price depreciation or increase. The reason for bitcoin being secured against inflation is that the creator(s) wanted a currency with a limited supply. It was planned to produce 21 million bitcoins by 2140; this limited supply gives bitcoin a big value in the market and its price has risen from 6 cents to over $1000 before dropping back down to around $600. The reason for these big fluctuations is that it is still unstable. The price of bitcoin is currently hovering around $1700 (15/05/2017).
Where do People get Bitcoin?
People get bitcoin either by purchasing the currency, receiving payments in it, or by mining.
Mining bitcoin is like digging for gold as an individual or as a group, but the digging shovel is replaced by computers when it comes to bitcoin mining. The gold mine is replaced by a program to solve a computationally difficult puzzle, the participant who first solves the puzzle gets to place the next block on the block chain and claim the reward.
Some companies such as Titan Bitcoin are working to physically make this currency in the form of coins equivalent to the same value and bearing an 8-digit ID, but in this form bitcoin loses its most important features of confidentiality, fast execution and low fees.
Regarding the Cons of Bitcoin
Bitcoin’s crypto nature is both a positive and a negative, potentially facilitating illegal transactions on the internet. A prime example is the shadow “Silkroad” drug market, which primarily relied on bitcoin payments in the currency’s early days.
The second drawback are doubts about the mining process. Because no one knows what the puzzles that are solved by mining computers are, some have questioned the existence of an anonymous organization working in secret to solve puzzles in a very short time (that may otherwise need a hundred years to be solved) by using huge server farms to drastically increase computational power and have a leg-up on everyone else.
The third one is the mysterious identity of Satoshi Nakamoto. No one knows if this is a man or a woman or a group of people. And we also don’t know how much bitcoin this shadow character may potentially possess. If it was a country hiding behind this figure and owning most of the shares, it can potentially cause a change in the power dynamics of the world.
It is also worth mentioning that not all economist and experts are in support of bitcoin, with some of them having doubts about it becoming a bubble that can cause an economic crisis. So you should be wary of any potential risks before investing in bitcoin.