In the past year, the hype around cryptocurrency and bitcoin has exploded. In simple terms, cryptocurrencies are a digital storage of value. Although it is not a legal tender in many places across the world, many individuals invest and trade in bitcoins. Unlike traditional currencies, the government has little to no control over the circulation of cryptocurrencies. They operate on open-sourced platforms using blockchain technology.
What is a Bitcoin
Bitcoin, founded in 2009, was the first kind of cryptocurrency. A complex process using advanced computer software to solve mathematical problems emerged to create bitcoins. Each bitcoin has a private code within. A digital wallet on your computer or mobile serves as a storage unit for bitcoins. It is possible to buy bitcoins using actual money or create them by a process called mining.
BBC says that in order for the digital asset system to work, people can make their computer process transactions for everybody. The computers tackle incredibly difficult calculations with increasing complexity. Occasionally, the owners get rewards for generating bitcoins through the mining process. It is extremely tedious as the complexity of these calculations keeps increasing with time. The total mineable limit for this cryptocurrency is 21 million bitcoins.
How do Bitcoins Work?
The transaction process is extremely simple for investors, but there is a lot more that goes behind the scenes. Bitcoins use blockchain technology — a technology that uses an encrypted shared public ledger. Nerdwallet defines each transaction as a “block” that is “chained” to the code. This permanent record of each transaction is encrypted using a hashing algorithm. Blockchain technology is at the heart of over 6,000 cryptocurrencies that have followed in Bitcoin’s wake.
Bitcoin wallets have public and private keys for proof of authorization that allow owners to digitally sign the transactions. You can also send bitcoins in a tiny amount. The smallest divisible part of a bitcoin amounts to one-millionth of one bitcoin.
Is Bitcoin a Good Buy?
Bitcoin is unregulated with little to no control by the government and the transactions through the network are anonymous. These features distinguish bitcoins from traditional currencies. In 2020 there were many events raising doubts on the efficacy of the global monetary system. The growing uncertainties surrounding the COVID-19 pandemic have pressurized global economies to a large extent.
Digital payments giant PayPal has expanded its platform to allow trading of cryptocurrencies including Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. One might even consider this as a reason behind the bitcoin price rally to $20,000.
Bitcoin and blockchain can usher in an era of online payments with an instantaneous settlement. However, this cryptocurrency has met with a lot of skepticism from governments. The perception that bitcoins are scarce makes it attractive for investors. Currently, 18.53 million out of the 21 million bitcoins are in circulation.
Buying bitcoin tokens does not give an investor any ownership in the underlying blockchain, says MotleyFool. With the absence of ownership, the potential to drive a digital payment revolution is less likely to happen through bitcoins.
The Bitcoin craze is trending and there is a possibility that they perform exceptionally well in the future. But they are still an extremely risky investment class. Bitcoins have dipped to extreme lows in the last decade and soared to incredible highs.