Bitcoin is a decentralized cryptocurrency that has sparked great interest in the last year.
At its highest point in mid-December 2017, the value of one bitcoin was estimated to be $19,500. As of Jan. 29, the value has dropped to approximately $11,150.
The dramatic fall in value seems alarming. Has bitcoin lost its novelty? To quote Lewis Carroll, let’s “begin at the beginning.”
On Nov. 1, 2008 a man named Satoshi Nakamoto published a paper outlining his design for a new cryptocurrency that he called “bitcoin.” That name is a pseudonym and the actual identity of the creator—or team of creators—is unknown.
What made bitcoin different from other cryptocurrencies is that it is not issued or backed by any banks or government. Cryptocurrency is a subset of fiat money, which is currency without any intrinsic value. That means that bitcoin is valuable only because people give it value.
So, what exactly is bitcoin?
According to the ex-employee of a cryptocurrency foreign trade market, Daniel Lee, bitcoin is a very long piece of code that fits a specific algorithm. This extremely long line of code is the blockchain, and every piece of bitcoin is part of that blockchain.
Bitcoin’s website defines the blockchain as “a shared public ledger on which the entire Bitcoin network relies.”
Bitcoin is decentralized, meaning that its design is public and available to anyone and everyone. No single entity owns or controls the Bitcoin network, or blockchain, and any person can join this lucrative community.
There are two basic ways to get started in Bitcoin.
The first is to buy bitcoin from someone, which is how most people get their start. This can be done through a cryptocurrency market, in which a transaction is made between different Bitcoin addresses and verified through a cryptographic signature.
The second method is a little more hardcore. Anyone can go out and buy a computer that will be dedicated to “mining” for bitcoin. The term “mining” is used in this context similarly to how it would be used to mine for gold. In that scenario, a miner is looking for more gold than is currently in the market.
In this case, mining is “the process of making computer hardware do mathematical calculations for the Bitcoin network to confirm transactions and increase security,” according to the Bitcoin website.
“When buying bitcoin from someone, you are buying whatever portion of the blockchain they own. Mining is making new blockchain. I own it because I made, then I can sell it to someone else,” Lee said.
Getting into Bitcoin has a relatively low barrier-to-entry, but what are the risks?
Because Bitcoin is only worth what people value it at, investing in Bitcoin is a bit like gambling. Like the stock market, Bitcoin’s value has highs and lows.
Although more and more places are beginning to accept the cryptocurrency, Bitcoin is still not useful as a currency in itself. At this point, the use of Bitcoin is mostly limited to selling it for actual currency when its value rises.
“Tomorrow everyone could decide that Bitcoin is worthless and not believe in it anymore, so whatever money you put into it is now worthless,” Lee said. “Therefore, all investments have some kind of risk, because it could be worthless tomorrow.”
For those with money to spend, and an inclination towards risk-taking, Bitcoin is the perfect way to generate money.
However, for most people, like Lee, it is not practical at this point in time.
“If [Bitcoin] was more useful, I’d probably be more likely to get my hands on some,” Lee said.