It’s not exactly the age-old question, but it is one that’s been around for more than a decade. What is Bitcoin all about?
For investors who are new to the world of cryptocurrency, Bitcoin can feel puzzling. We’re here to break it down for you, so you know what you’re getting into if—or when—you invest.
TL;DR
- Bitcoin is a decentralized blockchain network, and Bitcoin (BTC) is a digital asset of the same name.
- Bitcoin was first launched in 2009 by Satoshi Nakamoto, a name many people believe to be a pseudonym.
- You can day trade, trend trade, hedge, or buy and hold Bitcoin.
- Generally, things like supply, news, and economic applications impact Bitcoin’s value. As for the latter, more businesses are accepting Bitcoin as payment as we speak.
What Bitcoin is all about, explained
When learning what Bitcoin is, you’ll run into a lot of jargon. As you get used to cryptocurrency, these words will become more familiar. Until then, let’s help deconstruct things.
Bitcoin is a decentralized blockchain network, aka a network where no single entity holds power.
This decentralized network lets peers trade directly with one another, no middle man required.
Bitcoin (BTC) is a digital asset, or cryptocurrency, of the same name. To give the coin value in the real world, it’s valued against fiat money, aka governmental currency. For example, on July 26, 2021, 1 Bitcoin was worth $39,050.70 USD.
Because it’s not a fiat that’s attached to a government, Bitcoin is a global currency.
When Bitcoin started
Bitcoin first launched in 2009, making it the original cryptocurrency.
If you look up who founded Bitcoin, you’ll stumble upon a name called Satoshi Nakamoto, the builder of the world’s first blockchain database. However, Nakamoto is often considered to be a pseudonym for the real creator or creators.
Legendary computer programmer John McAfee says he believes a team of 11 people helped to create Bitcoin, including a computer scientist named Craig Wright. However, there’s no proof for this, and McAfee’s claims are still a theory.
The mystery behind Bitcoin’s creation hasn’t kept the coin from reaching serious success. From 2015–2021, it gained more than 10,000 percent of value. That doesn’t even include the first six years of the coin’s existence.
How Bitcoin trading works
Like stock market investing, traders can move Bitcoin using strategies like day trading, trend trading, hedging, or buying and holding. You’ll want to choose your crypto exchange based on the strategy you want to employ.
Basically, you deposit cash into your brokerage account and use it to fund your Bitcoin purchase. When you’re ready to sell, you can keep the asset as Bitcoin or transfer it to cash.
In the future, you may be able to get BTC exposure through exchange-traded funds, but the SEC has yet to approve a single application.
How Bitcoin price is determined
When buying and selling Bitcoin, it helps to know what causes the price of Bitcoin to move up and down.
Bitcoin and other altcoins (aka coins that aren’t Bitcoin) tend to be more volatile than stock market securities.
It’s hard to predict how the price of Bitcoin will move in the future, and there are no guarantees. There are three general factors that play into Bitcoin price shifts:
- Supply: The Bitcoin supply is finite, and it’s currently capped at 21 million coins. Analysts expect that supply to be guzzled by the year 2140. As demand rises, so too will Bitcoin’s price.
- Crypto news: This refers to any press relating to Bitcoin’s value, endurance, and security. It also refers to changes in the broader crypto market, such as regulatory shifts that impact Bitcoin’s viability. For example, Treasury Secretary Janet Yellen talking about the risks of crypto have caused Bitcoin to drop in the past.
- Application and integration: Bitcoin’s price responds to increased application of the cryptocurrency in lieu of fiat. More integration into the business and banking market can cause prices to rise. For example, Amazon posted a Bitcoin job ad, which caused the coin’s value to surge.
More businesses are accepting Bitcoin as payment
Only a small fraction of mainstream businesses currently accept Bitcoin as payment. Well-known companies include Wikipedia (which accepts donations using Bitcoin), Microsoft, and Overstock.
Other businesses take Bitcoin through third-party apps that let users convert rewards points and cryptocurrency holdings into cash. One example is Starbucks, which partners with the app Bakkt.
Rumors are swirling that Amazon may be next on board to implement Bitcoin, as well as altcoins like AMP and DOGE. However, the e-commerce brand has yet to confirm the whispers.
Tesla CEO Elon Musk once teased that the EV company would accept Bitcoin as payment, but he quickly backtracked his statement. Musk said he would consider accepting Bitcoin in the future.
What is Bitcoin mining?
Bitcoin doesn’t appear out of thin air. Every time a new block gets produced for a token, it must be mined.
Bitcoin miners across the world have server farms for this specific purpose.
The Bitcoin blockchain operates on something called a proof-of-work (PoW) consensus algorithm, which requires servers to compete with one another to produce new blocks.
These servers are basically solving puzzles through the Bitcoin network, which maintains a certain difficulty level to keep modern computers working harder (so the blocks cannot be immediately mined).
Is Bitcoin bad for the environment?
Why did Musk backtrack his Bitcoin payment proposal for Tesla? Because of its perceived environmental impacts.
Bitcoin’s PoW consensus mechanism requires energy. The Cambridge Center for Alternative Finance (CCAF) says that the Bitcoin network uses about 70 terawatt hours of electricity per year, which represents about 0.35 percent of the global energy usage. While it’s not the key source of energy use in the world, Bitcoin mining does contribute to it. However, its energy usage has trended downward recently.
As of right now, renewable energy sources aren’t a viable solution. This is because the Bitcoin network gets most of its energy from China and there’s just not enough accessible renewable energy to power the Bitcoin network 24 hours a day.
It’s unclear how the blockchain’s carbon footprint compares to that of large banks and other centralized financial institutions, which many investors hope Bitcoin could replace. It’s a complicated issue, and one that crypto advocates are working to address.
Bottom line
Many people associate the word “crypto” with “Bitcoin” given its roots. Even with the rise of altcoins, this token remains the basis upon which the rest of the crypto market operates. Is Bitcoin right for you? That’s your prerogative. What we do know is that demand for BTC is on the rise, and the real-world applications for this digital asset are getting more tangible every day.