Jersey Consumer Council

Consumer News

What is Bitcoin?

March 7, 2018 Money Matters No Comments

Simply put, it’s a type of digital currency, called a cryptocurrency. No notes to print or coins to mint. It’s decentralized — there’s no government, institution (like a bank) or other authority that controls it, but instead is controlled by the software itself.

By using blockchain technology, cryptocurrencies are not subject to any central controls. A blockchain is a global network of computers which can be used to maintain a digital ledger of every owner of a cryptocurrency and the transactions they make. When, for example, a Bitcoin transaction is made (buying, selling, transferring or creating Bitcoin), the record of that transaction is securely encrypted, time-stamped and updated into a block which is added onto the historical record of all Bitcoin transactions. Each block in the chain is unique and it is virtually impossible to remove or change data which has been added to the chain. This means that transactions are verifiable without the need for a central authority, such a bank, to oversee that process. In theory, Blockchain technology allows us to securely transact with one another via a peer-to-peer network without a middleman, such as a bank, charging us for the privilege of doing so.

It isn’t issued from the top down like traditional currency; rather, bitcoin is ‘mined’ by powerful computers connected to the internet, by slowly releasing a predetermined set amount, randomly as a reward to those helping secure the network.

Bitcoin was invented in 2009 by a person (or group) who called himself Satoshi Nakamoto. The stated goal was to create “a new electronic cash system” that was “completely decentralized with no server or central authority.”

Looking back, we began using money as the tool used to exchange value; historically this was gold as it is rare, tangible and worked very well. Although gold is heavy, so then came paper money which originally was ‘gold certificate’ being a piece of paper saying you own some gold sitting in a vault. Trusting in paper was not easy at first.

Nowadays we use what is termed flat money which means that it can’t be exchanged for just a single item. People accept this money in return for goods or services because they know that they themselves will be able to use it at a later date. Money now has no link at all with precious metals. Now we have cryptocurrencies of which Bitcoin was the first, and currently the largest.

What determines the value of a bitcoin?

Ultimately, the value of a bitcoin is determined by what people will pay for it. value of a bitcoin is based on its properties (digitally rare, trustless, secure and predictable issuance), and how much people will pay for it.

In this way, there’s a similarity to how stocks are priced.  The protocol established by Satoshi Nakamoto dictates that only 21 million bitcoins can ever be mined — about 12 million have been mined so far; but as it’s digital, each coin can be divided down to 8 decimal places. Even so there is a limited supply like with gold and other precious metals, but no real intrinsic value. This makes bitcoin different from stocks, which usually have some relationship to a company’s actual or potential earnings.

Without a government or central authority at the helm, controlling supply, ‘value’ is totally open to interpretation. This process of ‘price discovery,’ the primary driver of volatility in bitcoin’s price, also invites speculation and manipulation.

Because bitcoin is so new and decentralized, there is plenty of unknowns. Even the technical rules for mining are still evolving and up for debate.





Comments are closed.