There is a lot of coverage on Bitcoin in the news lately for breaking the $100,000 barrier. A lot of people are wondering what is Bitcoin and why is it getting so much attention. Bitcoin is a cryptocurrency, which is often referred to as a digital currency. Many people think it was the first cryptocurrency, however there were others in existence before its inception like eCash and B-Money. Bitcoin was the first one to really become popular and kick of the recent trend we see today. But what exactly is a cryptocurrency?
One of the main attributes of modern cryptocurrencies is they operate on blockchain technology. Blockchain is a decentralized ledger system which is different from current centralized systems. Traditional financial systems are centralized through banks who control financial transactions and storage of funds. With blockchains, anyone can hold and view a public ledger to see transactions. This means any two people or institutions with copies of the ledger can validate each other. When you have tons of people validating ledgers, it’s hard to have fraud with so many checks and balances.
Bitcoin leverages blockchain technology so that when anyone buys a unit of Bitcoin, the transaction is logged and distributed to the public ledger. You then hold that digital wallet with your unit of bitcoin, and the ledger references the unique transaction ID that is unique to only you. The ledger does not say Jane Doe holds 1 Bitcoin, but rather an ID which would be very hard to distinguish. If you were to sell, it would log a transaction of that Bitcoin to another digital wallet and distribute to everyone with a copy of the ledger. Many crypto companies will compensate certain people for compiling and validating the ledgers either by mining crypto currency with powerful computer systems or by staking crypto currency.
So knowing how cryptocurrency works, why is Bitcoin so popular? Crypto currencies work similarly to stocks in that their perceived value drives the price, and they are traded like a stock. Bitcoin is similar to gold in that it has a finite quantity. It was designed to reach a limit, after which no more can be created. This is a popular option especially for those who fear inflation. With cash as an example, the government could print more money to inject in the economy which devalues the dollar. If the federal government printed twice as much money, a dollar would be half the value since everyone now has two dollars when they used to have only one. Bitcoin will soon reach its limit and no one will be able to mine more, which would make it a scarce commodity.
Recent developments have also prompted interest in Bitcoin. One reason is that there are now Bitcoin ETFs which allows more traditional investors to add Bitcoin to their investment portfolio. Previously you would have to go to specific cryptocurrency exchanges to trade cryptocurrencies. I talk about ETFs and other investment options in my course if you would like to learn more. Another reason Bitcoin could be growing in popularity is indications from the feds that interest rates won’t be coming down anytime soon. As noted above, Bitcoin is often seen as a safe haven for those wary of assets prone to inflation. Lastly, even the media attention could be driving the Bitcoin price. As I noted in a previous post on herd mentality, if people see Bitcoin rising in value they may feel a strong urge to get in on the action.
So having read all about Bitcoin and cryptocurrencies, the next logical question is should I invest in Bitcoin? Like any investment decision, that is something you will need to decide for yourself. I personally see cryptocurrency as akin to gambling. Much of cryptocurrency is speculative and there is no real value backing the price. Cryptocurrencies have a sorted history of scams and rug pulls where people hype up value of currencies or meme coins, and then sell when values peaked leaving everyone else holding the bag. Hawk-tuah girl Halyey Welch had a rough exposure to meme coins in her recent launch which hurt a lot of people. For me personally, I hold some Bitcoin but it is a small percentage of my portfolio.
