Let me just code a million dollars.
Updated: Mar 27, 2018
Magic internet money, you can’t go wrong with the classics.
What is money? Money is just a piece of paper which is a tool for trade. Well then, what is Bitcoin? Bitcoin is a cryptocurrency which is both a virtual currency and an online payment system.
Who created Bitcoin?
An anonymous programmer/s created the blockchain technology and bitcoin under the name pseudonym of Satoshi Nakamoto. Satoshi’s identity remains a mystery as he left the scene and handed the currency over to Gavin Andresen.
Where do Bitcoins come from?
Instead of the central government and trees deciding when and how much money to print, as cryptocurrencies are decentralized, the miners create the supply.
As soon as the Bitcoin network started operating in 2009, a new bundle of 50 bitcoins was released every ten minutes. A new package would be given to one of the computers which assisted in updating and maintaining the blockchain* ledger.
For your computer to be chosen, the computers in the network partake in a computational race, which is often called Bitcoin mining. The miners use appropriate software to solve math problems in which a certain number of Bitcoins are rewarded. Essentially, you are ‘paid’ to solve math problems correctly eventually, the mining will stop when there are 21 million coins worldwide (approximately in 2140).
Once the miner wins the coins, the bundle can be divided into up to 8 decimal points and transferred to anyone with a Bitcoin address. Bitcoin has started to become a medium of exchange not only for goods (in certain places) but also for financial transactions; in the stock market for example.
Why Bitcoin?
The transparency yet secrecy is what makes bitcoin so unique.
Once a transaction has been made it is added to the ledger and is confirmed using certain algorithms by computers on the Bitcoin network. As a result, the ledger has solved the deathly issue of double spending killing of previous digital currencies. Despite the digital coin being a small piece of code, it can easily be copied multiple times and sent to numerous people; the blockchain stops this from happening as the computers on the network reach a consensus that the coins’ owner has now changed.
Bitcoin is the shield for drug dealers. The online bazaar Silk Road offered the trade of illegal substances such as cocaine and heroin for bitcoins. Due to the secrecy of the bitcoin address, the transactions occur without knowing the identity of the person holding the specific Bitcoin address. Despite Law enforcement officials looking at IP addresses or tracking down users in the Bitcoin ledger, these methods are often relatively unsuccessful and time-consuming.
Apart from its secrecy, Bitcoin is also decentralized. This eliminates the need for a middleman (The Central Bank) and therefore reduces/removes the transaction fee. Which is exceptionally beneficial for immigrants to send remittances to family members overseas as more money reaches families (especially for people who don’t have bank accounts or government identity cards). Bitcoin transactions have started to become more popular especially in LEDCS’ and emerging economies such as Argentina and Indonesia. Furthermore, the minimal transaction fee has begun to branch out into banks, and financial firms in which using the blockchain eliminated the need for a middleman, often the bank to help with the transfer of payments. As a result, the Bitcoin(s) can be transferred faster and more cheaply, resulting in the trade of stocks and bonds happening faster and cheaper.
The Bubble:
There may be other reasons for trading bitcoin, but it all comes down to the fact that it makes money. Type ‘b’ into google and amongst the list bitcoin will be there. Indicating, that bitcoin has reached another level, the excitement that the stock markets faced during 1999-2000 about the dot-com phase is now being re-lived through Bitcoin and other cryptocurrencies. This sudden excitement has caused the rapid rise in the price of bitcoin, as of 03/03/18 one Bitcoin is worth 8168.57 British Pounds.
The supply of criminals haven’t suddenly increased, so why the sharp increase? People are not buying bitcoin to be used as a medium of exchange in their daily lives (due to the volatility of the currency). Instead, people are buying Bitcoin because they assume other people will buy it from them at a higher price putting the ‘greater fool theory’ into practice. It is one thing to become a millionaire from investing in its ‘early days,' but it is another to give in to Keynes animal spirit behavior; as a result, more people invest in bitcoin causing demand-pull inflation. However, what many people don’t seem to realize is that gaining profit when the bubble is about the burst is difficult.
Once people wake up and realize that the profit received from investing in Bitcoin is starting to dry up, people will sell. The herding behavior that caused the sudden rise in demand will cause an excess in supply resulting in a dramatic fall in the Bitcoin value.
* Blockchain Ledger: a public ledger containing all the transactions ever made using the currency
Sources:
https://www.economist.com/blogs/buttonwood/2017/11/greater-fool-theory-0
https://www.nytimes.com/2015/11/05/business/bitcoin-basics.html
By: Kareena Kamdar