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What is Bitcoin? A Beginner’s Guide to the World’s First Cryptocurrency

Bitcoin (BTC-USD) – the world’s first digital currency – has been a hot topic in financial circles for at least a few years, and arguably doesn’t need to be introduced.

Polls suggest that a majority of Americans have at least heard of it. Simply put, Bitcoin is a virtual currency (aka cryptocurrency) that can be exchanged through online transactions and is stored on a digital ledger. Once traded for pennies on the dollar, a unit now costs nearly $ 40,000 with a market cap of nearly $ 750 billion.

Although the outlets that accept cryptocurrency are still limited, Bitcoin is arguably the most easily traded of all cryptocurrencies. A small but growing number of service providers are accepting virtual currency, which can be used to purchase goods in video games, exchanged for US dollars or other fiat currencies – and even pay for goods and services in a few places. .

Cloudy starts

Bitcoin was founded in 2008 by an unknown individual or group by the name of Satoshi Nakamoto. Although feverish speculation has surrounded Nakamoto’s true identity – and some have claimed to be Nakamoto – this has not been confirmed.

Nakamoto began work on the code that would ultimately serve as Bitcoin’s backbone in 2007. In 2008, a white paper for cryptocurrency was first published, which created the original software reference implementation. (the program that set the technical standards for Bitcoin), and served as an effective starting point for cryptocurrency.

Bitcoin was then created as open source code, which means anyone can use it. As of today, there are around 11,000+ cryptocurrencies on the market today.

Fairly rightly so given its libertarian beginnings, Bitcoin’s main distinguishing feature is its decentralized nature. Unlike other forms of payment, no centralized organization or entity controls the currency or has the power to regulate the creation of more Bitcoin or the transactions that occur with it.

Transactions are secured using blockchain technology (more details below), but no authority has the power to reverse transactions and there is no clearing period before funds can. be dispersed. These very characteristics have raised concerns among regulators about the potential for theft, fraud and illicit transactions.

How it works

Bitcoin mining computer servers are seen in the Bitminer factory in Florence, Italy on April 6, 2018. Photo taken on April 6, 2018. REUTERS / Alessandro Bianchi

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 math problems. Bitcoin uses a “proof of work” network, which confirms transactions by proving that some specific computational effort has taken place.

Mining requires a significant amount of computing power, which has led Bitcoin to receive criticism that the energy-intensive process is bad for the environment – a point recently raised by Tesla CEO (TSLA) Elon Musk, which sparked a storm in the crypto markets.

Bitcoin uses blockchain technology, a 21st century innovation that allows transactions to be linked together through a digital ledger. Cryptocurrency was the first application of this technology, but it has since been extended and used in other financial and technological applications.

Price bubbles and volatility

Bitcoin’s price action is not for the faint of heart, one of the reasons critics argue that it is not stable enough to succeed fiat currency. And whether or not bitcoin has intrinsic value has been the subject of intense debate.

“Bitcoin is not a currency, it is an asset,” Pavan Sukhdev, chairman of environmental advocacy group WWF International and former chief executive of Deutsche Bank, told Yahoo Finance in a recent interview. He pointed to the extreme volatility and lack of support value as the reasons for its illegitimacy.

Cornell University professor Eswar Prasad 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 failed miserably in its stated purpose,” he recently told Yahoo Finance.

For example, in the spring of 2011, the price went from $ 1 to $ 32 in three months. In November of the same year, Bitcoin fell sharply to around $ 2 per coin. This was only the first of many price bubbles that saw Bitcoin rise and fall – both quickly and sharply. And by December 2017, the price of a unit had reached a new record high of over $ 20,000.

It was around this time that Bitcoin made its way to the mainstream, creating the first wave of “Bitcoin millionaires” (and, later, Bitcoin billionaires). Once again, the bull market turned out to be volatile and took the currency below $ 7,200 in two years.

The price of Bitcoin virtual cryptocurrency is displayed on a phone screen in this photo taken on April 13, 2021 in Kiev, Ukraine.  The cryptocurrency Bitcoin has seen an increase of over US $ 60,000, as media reported on April 13, 2021 in Kiev, Ukraine.  (Illustration photo by STR / NurPhoto via Getty Images)

The price of Bitcoin virtual cryptocurrency is displayed on a phone screen in this photo taken on April 13, 2021 in Kiev, Ukraine. The cryptocurrency Bitcoin has seen an increase of over US $ 60,000, as media reported on April 13, 2021 in Kiev, Ukraine. (Illustration photo by STR / NurPhoto via Getty Images)

However, with Bitcoin now finding its foothold in the sea, it has gained mainstream acceptance and has benefited from investments from large corporations and banks. Bitcoin hit a record high of over $ 60,000 in April before falling back to just under $ 40,000 at the end of July.

Tesla, Black Rock, Inc. (BLK), Square (SQ) and BNY Mellon (BK) are just a few of the growing number of large companies that have found a way to gain a foothold in a checkered but growing market. expansion. With more legitimate support, more people than ever have invested in cryptocurrency.

Investment opportunity or legitimate currency?

Bitcoin’s price roller coaster is complex and varied, and increasingly subject to government policy. China has launched a crackdown on cryptocurrencies and crypto mining, expressing displeasure with the subversive nature of a decentralized currency. Since the vast majority of bitcoin mining occurs there, restrictions on activity in the region can impact the price and contribute to wild swings.

Still, the continued fervor surrounding cryptocurrencies in general, along with a strong fan base, makes it likely that Bitcoin will continue to be more widely accepted by the public. The 2021 annual Bitcoin conference in Miami drew 12,000 attendees to discuss cryptocurrency and networking with each other. And some of its most devoted fans have even gone so far as to make it a religion.

Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusia.

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