Two weeks ago, Harry Potter author J.K. Rowling admitted that she didn’t really understand what Bitcoin exactly was. Many people jumped in to help, even Elon Musk did his part, but at the end of the day it was still to difficult for her. US billionaire Mark Cuban once stated in a discussion with the Winklevoss twins that as long as people didn’t understand what Bitcoin was and how it worked, it wouldn’t find mass adoption.
As we are well aware that the cryptosphere is still a small world in need of some explaining, allow me to try and give my version of what exactly Bitcoin is. Feel free to jump in with your comments and ideas.
What is it?
Bitcoin is the very first cryptocurrency, designed as a payment system that must be able to function completely decentralized, meaning without the intervention of governments or central banks.
The author of bitcoin’s infamous whitepaper calls himself Satoshi Nakamoto, but it is until this day not known who is behind this pseudonym.
At the moment of writing, a court case is still ongoing between an Australian businessman named Craig Wright, who claims to be Satoshi, and the family of his former businesspartner. Both sides claim ownership of the first 1.1 million mined Bitcoins. If Mr Wright does indeed hold the keys needed to open the wallet to these Bitcoins, he gains roughly 9.9 billion dollars.
Why was there a need for Bitcoin?
With the growing number of online transactions and rising mistrust towards banks after the 2008 financial crisis, the demand for a new digital payment method was increasing. And so, a means of payment that should be able to coexist with the existing financial system was born, named Bitcoin.
The most important thing is that this new system is set up on the internet and that there is therefore no single headquarter anywhere in the world.
Bitcoin is the answer to the demand for a new digital payment method. You can best see bitcoin as a digital form of cash money: a way of value exchange directly from person to person, without the involvement of a third party. We call this peer-to-peer.
This is the part where most people get lost, so stay with me on this one.
The backbone of the Bitcoin network is the blockchain technology.
A blockchain is a chronological chain of transaction data that cannot be adjusted afterwards. For Bitcoin, every ten minutes all transactions (all sales, purchases or transfers of the coin) are bundled and put in one block. Such a block is then added to the chain and this creates a chain of blocks: the blockchain.
A blockchain is therefore actually a kind of database, or a ledger like in accounting if you will. The strength of the bitcoin blockchain is that it is decentralized. That means there are thousands of computers around the world that keep a copy of the whole bitcoin transaction history. On this basis, these computers check whether new transactions are valid. In addition, it is virtually impossible to shut down the bitcoin network because you then have to destroy all those thousands of copies around the world at the same time.
Is it safe to invest in Bitcoin?
Well, this is where it gets tricky once again. Although the idea behind Bitcoin is in theory very good, the coin does suffer from wild volatility. Given the rising popularity of Bitcoin and blockchain, investing in cryptocurrency can be a very profitable experience indeed, but many people who got in at the end of the famous 2017 bullrun have lost a lot of money. At that moment Bitcoin had gained in popularity worldwide to such an extent that the coin shortly reached a price level near $20,000.
At the moment of writing these lines, in May 2020, Bitcoin trades around $9,000 so it all depends where is your starting point. If you invested in Bitcoin ever since the start, you have done the deal of a lifetime. If you invested in Bitcoin at the end of the 2017 bullrun, you are still waiting to recuperate your initial investment.
As in any financial industry, as long as it isn’t regulated, there will be scams and frauds in the cryptosphere, but the idea behind creating a decentralized currency is indeed fantastic. In the long run, I believe crypto will come out as a winner, and I’m sure that at a certain point even I might buy some.