How Bitcoin Can Help Us Understand Cryptocurrencies

Bitcoin and other cryptocurrencies have a reputation for being cryptic. Other people would consider them as currencies, while some would say that they’re more akin to investments and a store of value. Even the government and other financial institutions can’t fully agree on what they are. The Securities and Exchange Commission say that it is a form of security, while the IRS would say that it is a kind of property. 

How Bitcoin Can Help Us Understand Cryptocurrencies

This confusion and the lack of distinction is what makes Bitcoin and other cryptocurrencies a speculative and volatile investment. It also doesn’t help that they are pretty much unregulated. There is no central authority, no governments or banks that can step in to regulate.

And like most innovations, cryptocurrencies can evolve once we discover what they are truly capable of and what that would mean for the future of finance. 

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But what exactly are cryptocurrencies? We can start with the first and the largest out of all of them: Bitcoin (also known as BTC).

Bitcoin has attracted a large amount of attention because of its huge potential as an investment tool. Investors buy and hold Bitcoin with the hope that prices rise and make way for them to profit. 

Because Bitcoin is a digital currency, it obviously has no physical coins or assets tied to it. All of it exists on the Internet. Bitcoin makes use of its network to be able to make transactions and enable transfers between individuals all across the globe. There are no third parties like banks or payment services like Visa or Paypal involved. This leaves you in full control of your money. Operating as they do has led to people touting it as digital cash since you can send and store it as you wish. 

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Bitcoin originally really was intended to be the digital equivalent of cash. Its white paper was published in 2008, and in it, it was detailed that it was supposed to be a system that would allow peer-to-peer lending of electronic cash and that it would allow online payments that are direct and without intermediaries or financial institutions involved.

The paper’s author was named Satoshi Nakamoto, although his real name still remains unknown. Nakamoto mined the first Bitcoin in 2009 and then proceeded to create the software that the public would eventually use to mine Bitcoin. Afterwards, he made the first Bitcoin transaction, but the monetary value was yet to be assigned to those coins.

This was until a man from Florida had reportedly used 10,000 BTC to buy two pizzas at the price of $25. It wasn’t worth much back then, but at present-day 10,000 BTC would be worth $66 million.

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After that first Bitcoin transaction, digital currency exchanges were established in order to facilitate future online transactions. This was the first time in history where people were able to transact directly with each other across the world without going through numerous intermediaries. 

But if cryptocurrencies aren’t governed by any central authority, then how can we verify the legitimacy of the transactions? This is where blockchain technology comes in handy. 

Blockchain is the digital ledger technology behind Bitcoin. It acts as an accounting ledger that keeps and maintains a database of all Bitcoin transactions that take place in the network. It’s open-source and free for all, and anyone can view it with the use of the right software. When a person makes any kind of transaction on the Bitcoin network, the network updates the blockchain and adds a fully detailed ledger of the exchange for the whole network to see. 

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This kind of transparency is what makes the network secure. Blockchain has often been described as a kind of Google Sheet that all the people in the network have a copy of. If anyone made a modification, everyone would be able to see it. The blockchains make use of a person’s digital address when recording a transaction, making it pseudonymous.

So, what determines Bitcoin’s Value?

Well, initially, it was believed that Bitcoin is limited in supply by nature would make it similar to gold, but this was not the case. Gold did not get its high value by simply being scarce; gold became valuable because we began using it as currency and placed value upon it. It was simply the only metal available in the old days that was able to keep the impression of a royalty’s crest without looking shoddy like clay did. Gold would simply be another metal if humans hadn’t placed value on it. 

The same concept holds true for Bitcoin. It has value because people believe it can be used as a medium of exchange or a store of value. If you look at it, the price of Bitcoin is based around the belief that someday the network can be useful to society. Any kind of change in those beliefs reflect directly onto its prices, and that is why Bitcoin prices are so volatile.

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