The Basics of Bitcoin: What’s the Fuss about Digital Currency?

What is Digital Currency & what are Bitcoins?

Small group of engraved golden Bitcoins on whiteOver the past year or two, there has been increasing media coverage of so-called digital currencies like Bitcoin. But it’s not always made clear in these discussion what bitcoin actually is, so the who conversation can be somewhat confusing. With that in mind, it seems to make sense to take some time to explain the basics of bitcoin, and why it has caused such a ripple across the world in recent times.

What is digital currency like bitcoin?

Perhaps the best way to describe a currency like bitcoin is to liken it to gold or silver. Both of these commodities are in limited supply, and due to this they both have fluctuating prices based on supply and demand. In the same way, bitcoin too is priced by these factors. In terms of what a bitcoin is, it’s important to know that this currency doesn’t physically exist. It is a digital construct held on computers and servers across the world. Bitcoins can be broken down into smaller units, just like real money, and transferred from one person’s ‘virtual wallet’ to another. At this point, bitcoin has its own exchanges (like stocks and shares) and as of this writing, a single bitcoin is worth 203.00 GBP.

Why are bitcoins valuable at all if they’re digital?

The fact that bitcoins don’t physically exist raises a good question: why do they hold value at all? The answer to this is that due to the way bitcoins are created, there can only ever be 21 million of them in existence. But this answer raises yet another question: how are bitcoins made? Well, in order for a bitcoin to exist, it first needs to be ‘mined’ by a computer. It does this mining by solving countless mathematical problems of increasing difficulty; some of which will result in the production of a bitcoin. Because there are an incalculable amount of these maths problems, it takes the combined power of millions of computers to ‘mine’ bitcoins – it cannot be done by just one person without a lot of luck. Plus, as more of the 21 million coins are found, the problems get harder to solve, thus slowing production and raising the price.

The rise and fall of bitcoin prices

During 2013, bitcoin became subject to intense scrutiny by the press. At this time, the price of a single bitcoin soared from $9 USD to over $1200. During this unprecedented rise in prices, many people jumped on the bandwagon and began buying bitcoins and holding on to them. Just as with the gold rush all those years ago, this process actually began to devalue the coins, and the bubble inevitably burst. In just one night in December 2013, the price of a bitcoin dropped over 50%. For many people, this meant a significant financial loss, but such is the danger of investing in a volatile and all-new commodity like bitcoin.

As of today, bitcoin as a ‘crypto-currency’ is still plodding along. It has not suffered any more boom/bust scenarios since the 2013 crashes, but that doesn’t mean it won’t. So if you’re tempted by bitcoin, keep in mind that history, very often, repeats itself.

Written by Simon Morris

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