At over 5,000 USD, it's safe to say that Bitcoin has been practically unstoppable. It seems to be appreciating in value relentlessly, even in the face of headwinds that are, at times, formidable to say the least. From naysaying high-ranking representatives of the established banking industry to tightening regulatory nooses in China and other nations, Bitcoin is shrugging it all off in its meteoric ascent to ever-greater heights.
But what actually is Bitcoin? Where did it come from and, perhaps more importantly, where is it going?
Bitcoin is what's known as a cryptocurrency, a digital currency, or virtual currency. Essentially it's a kind of money that isn't really tangible the way paper money or coins are. Instead, Bitcoin resides on computers only, as well as, at times, offline devices. In effect, Bitcoin is fully electronic, although it can be converted to analog if need be.
Bitcoin is the brainchild of Satoshi Nakamoto, a mathematician with a desire to come up with a payment system to rival the current way we use money. Satoshi wanted Bitcoin to be decentralized, public, as well as immutable and counterfeit-proof. Basically, it had to be trustless, transparent and completely resistant to hacking.
These traits would ultimately result in Bitcoin being uncensorable and immune to fraud or abuse.
The heart and soul of Bitcoin is its digital ledger, a database comprising all the Bitcoin transactions that have been approved by Bitcoin network components called miners. Miners compete with countless other miners in the network to be granted the entitlement to splice blocks of approved transactions into what's known as Bitcoin's Blockchain.
In so doing, miners create new Bitcoin, which are added to circulation at a known rate, which, incidentally, halves every 4 years.
The decentralized nature of Bitcoin comes about from the many, many Bitcoin elements each having an updated copy of the Blockchain, containing all approved Bitcoin transactions. In other words, the system can do away with a third party validator or governor, since any kind of transaction miscalculation or misdeed would immediately come to light, given that all other network components expect to receive an exact copy of the correctly calculated ledger.
In a nutshell, deceiving the system can only be successful if and when all network components are deceived, at practically the same time. This is as good as impossible.
Because of its failsafe nature, Bitcoin has the potential to become a global currency - stateless and free of a government. And in fact, Bitcoin has already been used extensively by buyers and sellers from around the world. Bitcoin has been used to buy/sell everything, from pizza to houses.
But critically, because Satoshi also coded Bitcoin's protocol to be capped at 21 million actual coins, Bitcoin cannot be debased by printing or minting new Bitcoin ad nauseum. What this means in practice is that, in contrast to fiat money, Bitcoin is disinflationary. And this makes Bitcoin a very suitable store of value. In fact, in some circles, Bitcoin has already been nicknamed Gold2.0
Whilst the above fortes go a long way in explaining why Bitcoin's value keeps appreciating, it's probably this last strong suit, its finite number, that has contributed the most to its stratospheric climb. After all, with this cap, it's exactly the opposite of fiat money, which governments worldwide have been printing furiously in an attempt to inflate their way out of their debt trouble.
Bottom line: unlike regular money, Bitcoin's value isn't hollowed out by inflation year after year, the way regular money has been by central banks. Bitcoin is the ideal buy and hold asset.
But are there no drawbacks at all to Bitcoin? Well, just like any other relatively new development, Bitcoin has its share of teething problems. As Bitcoin was started from scratch, its code needs to grow as its user base grows. Just like early Internetters had to make do with 33.k modem speeds, Bitcoin users now aren't always getting top-notch throughput. However, just as Internet speeds increased manifold as the network matured, so too will Bitcoin's code improvements enable faster transactions.
And just like the early Internet years, the current Bitcoin applications may not always be as user-friendly as their later incarnations. Once apps are programmed that make Bitcoin accessible to everyone, network critical mass will be achieved, at which point the Bitcoin user base will surge exponentially, the same way Internet's usage has exploded in the past several years.
Clearly, bugs and nascency notwithstanding, Bitcoin holds incredible promise. In fact, Bitcoin is bound to result in rounds of serious disruption, particularly in FinTech. Whilst disruption isn't necessarily the most painless way forward, in the end, Bitcoin's frictionless transactions will be a boon to consumers and corporations, alike. Not to mention an indispensable element in view of Singapore's Smart Nation aspirations.
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I wrote the above article myself and it expresses my own personal opinions and views on Bitcoin. I am unable to guarantee that the information and/or results will be correct. Furthermore, I do not receive compensation for my writing and I have no business relationship with any of the companies mentioned in above article. In addition, I am not an investment advisor and above article is for purely informational purposes. Investors are advised to personally undertake adequate due diligence, or to consult a financial advisor in order to determine what assets - if any - are appropriate to invest in.