By now you have probably noticed the rise of Bitcoin and the effects it has on investors and the public. How did it come into existence and what is its future?
Bitcoin is a cryptocurrency and worldwide payment system. It is the first decentralized digital currency. No central financial institution govern its issuance or use, so transactions occur directly between users in a peer-to-peer manner. Transactions are verified by network nodes through cryptographic methods. Transactions are saved to a public ledger called a blockchain. Bitcoins are generated and given to miners to reward them for their computing power on the network.
Bitcoin was invented by an unknown person named Satoshi Nakamoto and released as open-source software in 2009. Due to its open source nature, anybody can add to its features. While this is good in theory, it has also led to many forking issues when different developers create alternate versions of the same code.
In January 2009, the bitcoin network came into being after Nakamoto mined the first ever block on the chain. It is a type of digital asset. Digital currency can be thought of as an alternative to currency used in fractional reserve banking, backed by a physical asset such as gold.
Nakamoto set a monetary policy based on artificial scarcity at bitcoin's birth that the maximum number of bitcoins in circulation would be 21 million.
Do bitcoins qualify as currency? Bitcoins have three useful qualities found in a currency: they are "hard to earn, limited in supply and easy to verify". Economists define money as a store of value, a medium of exchange, and a unit of account and agree that bitcoin do not meet all these criteria currently.
It has grown as a medium of exchange; as of February 2015 the number of merchants accepting bitcoin had passed 100,000. However, the bitcoin market has suffered from extreme
volatility, casting doubt on the property of bitcoin to act as a stable store of value.
There are a plethora of proponents and
critics of bitcoin. While there is adoption in small sectors of the world economy, the biggest risk to bitcoin’s value and viability is government intervention. If regulators step in to limit or ban outright the use and transmission of bitcoin as a payment mechanism, it will suffer the same fate as Napster: a great peer-to peer music sharing technology that was killed by central authorities. One thing is for certain, the future path of bitcoin will be anything but linear. If you are a bitcoin investor, buckle up for a wild ride.