Bitcoin, What You Need to Know About the New Currency Craze
This article originally written by Digital Content Intern Yusra Asif. Asif, is a senior media communications major at the University of Delaware, working as the associate news editor at The Review and a broadcast news reporter at the Student Television Network at UD.
As of this very moment, Bitcoin is trading at a value of $57,396.04. On March 9, Bitcoin’s market share was $950,099,876,661, the largest among all cryptocurrencies. With huge figures and complicated financial terms surrounding Bitcoin, a lot of people have no idea what Bitcoin is and how it works.
Founded in 2008 and launched in 2009 by Satoshi Nakamoto — whose identity remains unknown to the world — Bitcoin is a type of cryptocurrency.
You must be wondering what cryptocurrency is. Let’s start with the basics.
What is cryptocurrency?
In simple words, cryptocurrency is a digital form of cash. It is divided into two parts: cryptography and currency. Cryptography is associated with the process of converting ordinary plain text into unintelligible (which can’t be easily understood) text and vice versa. It is a method of storing and transmitting data in a way that only those for whom it is intended can read and process it.
How is cryptocurrency different from the banks?
Since cryptocurrency is a digital form of cash, it has no geographical limitations, unlike the banking system that we know today. For example, if A wants to send money (in USD) to B, he cannot directly transfer it, and has to do it through a bank, who will verify both the sender and the receiver and convert the currency after deducting a small transfer fee. In cryptocurrency, no intermediary is required, and A can directly transfer the money to B, with minimal charges. Also, unlike banks, cryptocurrency has tremendous transfer speed; it ranges from as low as 4 seconds to as high as 10 minutes for popular coins like bitcoin.
This sounds really good, almost too good. Are there any drawbacks to using cryptocurrency?
While cryptocurrency promises great efficiency, it also comes with a few disadvantages. Transaction errors once made, cannot be rectified. If a wrong transfer is made, A cannot ask for the money back from B — transactions are irreversible because no one knows the account number except the sender and receiver. Also, because cryptocurrencies like bitcoin promote anonymity, it is used for a lot of illegal exchanges on the dark web.
How does a bitcoin transaction actually work?
When you use a bitcoin, you get a unique wallet address — a combination of numbers and alphabets. When a new transaction is entered, it is transmitted to a network of peer-to-peer computers scattered across the world. This network of computers solves an equation to confirm the validity of the transaction, and once verified the transaction gets completed. The separate transactions or blocks are chained together to create a blockchain — a database of all transactions. Blockchains are a public ledger, so all the data is available to the public.
Since the transactions are open to everyone, is using Bitcoin safe?
If a hacker wants to alter the blockchain and steal Bitcoins, they would have to alter their own single block, which would then no longer align with everyone else’s blockchain copy. On cross referencing, other users will see this one copy stand out and the hacker’s version would be cast away as illegitimate. Succeeding with such a hack would require an immense amount of money and resources due to the size of the bitcoin network and how fast it is growing. Moreover, all the members on the chain would resort to a new chain that has not been corrupted. This would also cause the corrupt block of Bitcoin to plummet in value, making the hacker’s attempt ultimately pointless. The bitcoin network has been specifically built this way to encourage more people to participate.
How do people earn profit in the Bitcoin trade?
Profits using Bitcoin are generally made when transactions are decoded. When A transfers Bitcoins to B, it has to be verified by some entity, like a bank. There are thousands of people all over the world wanting to verify bitcoin transactions — these people are called miners. The Bitcoin transfer will not be in simple words, but in cryptography. The miners all over the world try to solve this currency cryptography like a maths problem, using powerful computers. Once they solve this problem, they get a reward, and this reward or profit is in the nature of acquiring more bitcoins. However, these bitcoins are mined, no one is transferring it to them. The more transactions a miner can decode, the more Bitcoins they acquire.
Is Bitcoin like money then?
No. Unlike money, the supply of bitcoins is limited, partly the reason behind its high value. There are exactly 21 million bitcoins all over the world and out of them, 18.6 million bitcoins are currently in circulation. Bitcoin is not currently money as economists define money. Money must be generally acceptable, which Bitcoin is not. Although some entities have indicated a willingness to accept payment in Bitcoin, it can be classified as a form of barter — exchange of an asset that is not money for another asset, good, or service.
Should you invest in Bitcoin?
Before deciding to invest in Bitcoin there are a few things to keep in mind. Bitcoin is volatile. In Dec. 2017, the value of Bitcoin soared to a record $19,000 only to dip to a low of $4000 in March 2020. Since then, Bitcoin’s stocks have rallied up again to $42,000 per coin. However, in Jan. 2021, it was again trading at $36,000, causing a lot of uncertainty and fear.
To understand just how volatile bitcoin is, its value skyrocketed as much as 20% after Elon Musk used the hashtag #Bitcoin in his twitter bio, adding $5000 in an hour to the total value. During the last week of Feb. 2021, Bitcoin lost approximately 21% of its value. Since then it has recovered and set a new record price.
“Bitcoin is a speculative asset,” James Butkiewicz, an economics professor from the University of Delaware, said. “This price volatility makes Bitcoin a speculative asset. Someone considering buying Bitcoin should be able to afford losing part to all of the money spent on Bitcoin. I am not saying that the price of Bitcoin will necessarily fall, just that this is a possibility.”
Although Bitcoin involves very high risk, a lot of people have made millions of dollars from its trade. Charlie Shrem, co-owner of Evr, a gastropub in Manhattan became one of the youngest millionaires using Bitcoin, by setting up one of the first places to accept payments in Bitcoins. He has started his own online platform called Bitinstant where people can buy and exchange Bitcoins.
For most Americans, the thought of investing thousands of dollars in one Bitcoin sounds dreadful, not to mention the high risk factor. However, here is an interesting thing about Bitcoins. Unlike shares, you can purchase a percentage of a Bitcoin instead of buying the entire value of the coin. Bitcoin investors are allowed to invest in as low as 0.1% value of the coin, which as per today’s value, would amount to $57. If you want to begin investing in cryptocurrency or are simply curious, $57 is probably a safe way to start.
Disclaimer: This is not financial advice. Please seek help and information from a professional financial advisor for any investment strategies. This information is not to be used towards a decision to invest.