In recent times, a frequent buzzword has been Bitcoin. Movements in the price of bitcoin have constantly made headlines and the volatility has definitely shocked people in the financial world especially those with a traditional mindset. To put it into perspective, 2017 was an exceptional year for bitcoins, where the value of one bitcoin rose from $900 all the way to a lifetime high of $19,783 before falling to $13,000 by the year-end. The fact that all this happened in a single year just showcases the volatility of bitcoins.
But what is a Bitcoin? Bitcoin is just one of many cryptocurrencies. However, it is the biggest and most famous of the cryptocurrency. It is an entirely digital currency that has been developed using computer technology, without the intervention of any Government or Central Bank.
Bitcoin works on the concept of a blockchain. In simple terms, the blockchain is a database or ledger of every bitcoin transaction that has ever taken place. This means that since the inception of bitcoins in 2009, every transaction in bitcoins has been recorded on the blockchain. The blockchain keeps on growing even as you read this article.
The blockchain is publicly available but every transaction is not recorded against the name of the person but instead against a numeric address that is assigned to that person. Hence, the blockchain is able to achieve the dual aspects of total transparency while maintaining the level of secrecy that a person dealing in bitcoins desires. The bitcoin itself is freely transferable from person to person using the personal numeric addresses to identify both sender and receiver.
A bitcoin is actually created through a complex and a competitive process called ‘Mining’. To mine a bitcoin, you need to perform various complex mathematical calculations on computers. These calculations are used to add a block to an existing blockchain (public ledger).
Bitcoin miners are rewarded for creating these new blocks, they are given a certain number of bitcoins for every block created. Like the availability of gold is limited, the number of bitcoins that can be mined or created is also limited by these complex mathematical calculations.
Bitcoins have emerged from a passing trend to an accepted form of payment and investment that cannot be ignored. It has challenged the notion that currency needs to be backed by the Government or even the fundamental principle that currency should have some intrinsic value. It is this lack of regulation and intrinsic value that has contributed to the high volatility of bitcoin prices. As an investor, any transactions in bitcoin should be approached with extreme caution. The price of the coin may not follow any logical trend and you will need to be prepared for high levels of uncertainty. The success of bitcoins has led to the emergence of new cryptocurrencies like Ripple, Litecoin and Ethereum. You can now even use a cryptocurrency wallet to keep your bitcoins safe. As we can see that through the wider use of bitcoins, cryptocurrency has slowly become more accepted. Like every other new technology, cryptocurrency has advantages and disadvantages that every investor should be aware of.
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