Bitcoin (BTC-USD) — the world's first digital currency — has been a hot topic in financial circles for at least the last few years, and arguably needs no introduction.
Surveys suggest a majority of Americans have at least heard of it. In layman’s terms, Bitcoin is a virtual currency (aka cryptocurrency) which can be exchanged through online transactions, and is stored on a digital ledger. Once trading for pennies on the dollar, one unit now costs nearly $40,000 with a market capitalization of nearly $750 billion.
Although outlets that accept cryptocurrency are still limited, Bitcoin is arguably the most easily exchangeable of all the cryptocurrencies. A small but growing number of service providers accept the virtual currency, which can be used to buy goods in video games, exchanged for U.S. dollars or other fiat currencies — and even pay for goods and services at a few places.
Bitcoin was founded in 2008 by an unknown individual or group going by the name Satoshi Nakamoto. Though feverish speculation has surrounded Nakamoto's true identity — and some have claimed to be Nakamoto — it remains unconfirmed.
Nakamoto began work on the code that would eventually serve as the backbone of Bitcoin in 2007. In 2008, a whitepaper for the cryptocurrency was first published, which created the original software reference implementation (the program which set forth the technical standards for Bitcoin), and served as an effective starting point for the cryptocurrency.
Bitcoin was then created as open-source code, meaning effectively anyone could use it. To date, there are an estimated 11,000+ cryptocurrencies on the market today.
Somewhat appropriately given its libertarian beginnings, Bitcoin’s chief distinctive feature is its decentralized nature. Unlike other forms of payments, no one centralized organization or entity controls the currency or has the power to regulate the creation of more Bitcoin nor transactions occurring with it.
Transactions are secured using blockchain technology (more on that below), but no authority has the power to reverse transactions and there is no clearing period before funds can be dispersed. Those very characteristics have raised concerns among regulators about the potential for theft, fraud and illicit transactions.
How it works
The process of creating bitcoin is known as mining. Miners engage in intense computer operations to verify transactions on the Bitcoin network. Mining rewards users for solving complex mathematical problems. Bitcoin uses a ‘proof-of-work’ network, which confirms transactions by proving that a certain amount of a specific computational effort has occurred.
Mining requires a significant amount of computing power, which has led to Bitcoin receiving criticism that the energy-intensive process is bad for the environment — a point recently raise by Tesla (TSLA) CEO Elon Musk, who sparked a firestorm in crypto markets.
Bitcoin utilizes blockchain technology, a 21st century innovation that allows for transactions to be linked together through a digital ledger. The cryptocurrency was the first application of this technology, but it has since been expanded and utilized in other finance and technology applications.
Price bubbles & volatility
Bitcoin's price action is not for the faint of heart, one reason why critics argue it's not stable enough to be a successor to fiat money. And whether or not bitcoin has intrinsic value has been a subject of intense debate.
“Bitcoin is not a currency — it's an asset," Pavan Sukhdev, the president of environmental advocacy group WWF International and a former managing director at Deutsche Bank, told Yahoo Finance in a recent interview. He pointed to the extreme volatility and lack of backing value as reasons for its illegitimacy.
Eswar Prasad, professor at Cornell University, was even more blunt. “Bitcoin was designed as a digitally anonymous medium of exchange that did not involve a trusted third party, such as a central bank, but Bitcoin has failed abjectly at its stated objective,” he recently told Yahoo Finance.
For example, during the spring of 2011, the price soared from $1 to $32 in a period of three months. In November of that same year, Bitcoin experienced a sharp drop back to around $2 per coin. This was but the first of many price bubbles that saw Bitcoin rise and fall — both quickly and sharply. And by December of 2017, the price of one unit had reached a new all-time high of over $20,000.
It was during this time that Bitcoin vaulted to the mainstream, minting the first wave of “Bitcoin millionaires'' (and, later, Bitcoin billionaires). Yet once again, the bull market proved volatile and dragged the currency below $7,200 within two years.
However, with Bitcoin now finding its sea legs, its gained more widespread mainstream acceptance and benefited off of investments from big-name corporations and banks. Bitcoin reached an all-time high of over $60k in April before falling back down to just under $40k by the end of July.
Tesla, Black Rock, Inc. (BLK), Square (SQ), and BNY Mellon (BK) are just a few of the growing number of big companies that have found a way to gain a toehold in a whipsaw yet broadening market. With more legitimate backing, more people than ever before invested into the cryptocurrency.
Investment opportunity or legitimate currency?
The roller-coaster of Bitcoin's price are complex and varied, and are becoming increasingly subject to government policy. China has initiated a crackdown on cryptocurrencies and crypto mining, expressing displeasure at the subversive nature of a decentralized currency. Since the great majority of bitcoin mining occurs there, restrictions on activity in the region can impact the price and contribute to wild fluctuations.
Yet the continued fervor surrounding cryptocurrencies in general, as well as a strong fanbase, make it likely that Bitcoin will continue to gain more public acceptance. The 2021 annual Bitcoin conference in Miami attracted 12,000 attendees to discuss cryptocurrency and network with each other. And some of its most devoted fans have even gone as far as to declare it a religion.
Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.