In 2018, bitcoin experienced a roller-coaster ride causing people to make or lose fortunes. What is bitcoin? Why did its valuation go from mere pennies to over $20,000 per coin and why did it drop to a fraction of it’s peak so quickly? Is it a good investment? To understand bitcoin, let’s start from it origin and the reason it was created in the first place.
We don’t have a choice. Each and every one of us participates in the global financial system and our financial security depends on the health of this system. This system was formed over several centuries. Our global financial system is fragile because it is mostly based on trust. The system is highly centralized with governments and financial institutions holding all the power. Many believe that governments have been negligent and financial institutions have used it to enrich themselves rather than providing service to the public. In the financial crash of 2008, the frailties and shortcomings of the system became apparent and the public was left to suffer and pay the cost of resuscitating the system. It was in this environment that Satoshi Nakamoto published his article which laid the foundation of a cryptocurrency.
In his paper, Satoshi proposed a system that allows the buyer and seller to bypass government backed currencies and financial institutions altogether. The integrity of a currency needs to be maintained by a third party. Government is this third party that creates a currency and maintains its integrity. Any currency seeking to replace government issued bills and coins need to fulfill this responsibility.
A cryptocurrency is essentially a mathematical function with finite outputs. Bitcoin miners run the calculations on high-powered network of computers. This creates the “bills” of the currency. Since the mathematical function can only output a finite number of outputs, the currency can maintain a certain value. When two persons conduct a financial transaction, they exchange the digital number, which is the coin. The transactions are recorded using a technology called blockchain. This ensures the integrity of the transaction network and simultaneously provides anonymity to buyer and seller.
The value of a cryptocurrency is solely decided by the market through supply and demand. No one has the authority to artificially inflate or deflate its value. It should however be noted that at any given time, miners are generating more coins, which will impact its supply. At the same time the demand for the currency fluctuates constantly.
Due to anonymity and ease of transport, criminal organizations are using cryptocurrency. It is a great way to hide and launder money. Governments around the world are concerned about this aspect of cryptocurrency.
Governments have to power to print money (aka quantitative easing) which devalues the money you have in your pocket and bank. Cryptocurrency cannot be devalued by a government but it is constantly devalued and new coins are mined.
You will find a wide array of opinions on cryptocurrency. I think that cryptocurrency is here to stay but I cannot predict what its outlook would be in the future. Bitcoin is only one of many cryptocurrencies. Even you can create your own coin. I cannot predict which cryptocurrencies will survive and which ones will die. If you choose to buy cryptocurrency today, be aware that you are buying a lottery ticket. So don’t invest half of your fortune on it.
