What is Bitcoin?
by Michael Caplan
We’ve all heard about it in recent years, along with whispers that our current financial structure may be headed for extinction. Most have heard of Bitcoin, the most familiar form of cryptocurrency, but few understand what it is, why it was created, and how its value is determined.
We thought a simple overview might set minds at ease by — at the very least — providing a basic understanding.
A quick history
Bitcoin was the first cryptocurrency created. In 2009, an individual or group calling itself Satoshi Nakamoto created Bitcoin to combat what they (and many) believed caused the 2009 global financial crisis: reckless speculation by financial institutions, crooked government policies, and bailouts of the institutions and individuals that actually caused the crisis.
Over months preceding the crisis, many banks worldwide had seized customer assets and even frozen accounts without notice or permission. Then governments spent hundreds of billions of dollars of taxpayer money on bailouts for financial institutions. This left ordinary citizens to fend for themselves.
Bitcoin was created to empower people to regain control of their financial assets and to provide a secure, trusted, transparent way to secure, store and use their hard-earned money.
How cryptocurrency is created
Digital “coins” are created by “miners” — tech experts using sophisticated computers to solve math problems so complex they cannot be solved by hand or even the world’s most powerful computers. If or when a computer is able to break the code, a new coin is created.
How it is valued
The value of a cryptocurrency is based purely on speculation as it is not backed by any tangible asset (like gold) or government body. However, as more businesses and governments recognize and accept cryptocurrency as legal tender, the price soars. For example, February 2021, Tesla announced it would accept Bitcoin as legal tender for its automobiles. The company also invested 1.2 billion dollars in Bitcoin, further legitimizing the currency. Elon Musk even added a Bitcoin hashtag to his Twitter handle, driving the price of Bitcoin up by 20%. Those actions — plus others by industry players — helped fuel a significant rise in the price of a Bitcoin in just a few months from around $32,000 to approximately $65,000 per coin. Musk later sold his Bitcoin investment and stopped accepting Bitcoin for Tesla vehicles. The result: Bitcoin’s price dropped back to where it started and remains today, around $32,000 per coin.
As you can see, the value of cryptocurrencies rises or falls based solely on speculation — and the extent to which it is accepted and recognized as legal tender by businesses and governments around the world.
Should we fear extinction of traditional currency?
No one knows what the future holds. Cryptocurrency could supplant our current monetary system, continue to exist within the current system, or simply fade into obscurity. Whatever happens, it seems the only thing to fear is sinking more money into cryptocurrency today than one can afford to lose.
This writer would argue that there is more to be excited about if crypto becomes our new financial infrastructure because, potentially, it could end income taxes, bank fees and middlemen and bring about total privacy and security over one’s assets.