Bitcoin tends to be overly complicated for most to understand. The purpose of this post is to disseminate how it works in the simplest way possible since the idea of the currency is to mitigate the power imbalance between the layman and the savvy investor.
Bitcoin was created in 2009 by an anonymous entity named under the pseudonym 'Satoshi Nakamoto'. Although the true identity of Nakamoto is still unknown, their efforts have now been recognized on a global scale. Both institutional and individual investors continue to drive the value of the currency on an upwards trajectory, in an effort to diversify their portfolios. Indeed, as we explore the core principals of the technology, the value ascribed to it becomes more apparent.
How is Bitcoin’s Value Determined?
And what a value it has become! Soaring to AUD 50,000 over the last 15 years has proved every 'Bitcoin crash' wrong. But how did we get here, what is driving this price change and who controls its value? To best illustrate this, let's first differentiate traditional fiat currency with this new era's digital currencies. As a common practice among many countries, governments will often print money, consequently inflating its value. Such practices are not possible with Bitcoin as there are a fixed number of them in existence – 21 million to be precise. Currently, around 18.5 million of those are in circulation, and it is expected that the outstanding 2.5 million will be released before 2024. But what does that mean?
It is a widely held belief that due to this finite number of Bitcoins, the currency is much like 'digital gold'. Since the supply remains constant, the coin is intrinsically valuable. It should also be noted that once the remaining currency has been released, analysts predict that its value will skyrocket.
How are New Bitcoins Released into Circulation?
Unlike fiat currency, Bitcoin is created and released through a network of specialised computers called 'miners.' These computers' mine' or decrypt the currency, facilitating transactions between users and releasing new Bitcoins into circulation. This practice becomes progressively more difficult for the 'miners' as Bitcoins' total number reaches its maximum. As such, this is another means by which intrinsic value can be ascribed to the currency. The aggregation of all this complex number-crunching creates a payment system: the 'blockchain'. The blockchain moves crypto from one place to another.
Digital Signatures and Double Counting
One of the most significant flaws in traditional baking is double counting as any of the big players (i.e., banks) have the power to erase or reproduce transactions. The same isn't true for crypto, as the 'miners' accurately track and record your transactions on a digital ledger divided among multiple computers. This ledger's formation means that if one wanted to destroy evidence of a transaction taking place, they would need to physically destroy thousands of computers that store and record this information. Unfortunately, this is a near impossibility as these computers' location is scattered among multiple locations, potentially thousands of kilometres from each other, and their location is unknown. This digital ledger means that transaction history cannot be erased or modified.
Bitcoin is a complicated technology. The above is a mostly topical analysis of its merit. However, it's simple to identify its capability and its advantages over traditional currency despite its complexity. We here at e-Pocket aim to facilitate an open marketplace where you can trade crypto and fiat currencies and pay with cryptocurrency in the fiat-dominated world. Our dedicated team of engineers work around the clock to ensure that our clients have equal opportunity to diversify their portfolios for long-term gains, regardless of how big or small those investments may be. A cash-free future is on the horizon, you know it, we know it and as much as they hate to admit it, so do the bankers.
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Disclaimer: All writer's opinions are their own and do not constitute financial advice in any way whatsoever. Nothing published by e-Pocket constitutes an investment recommendation, not should any data or content published by e-Pocket be relied upon for any investment activities. e-Pocket strongly recommends that you perform your own independent research and/or speak with a qualified investment professional before making any financial decisions.