What is Bitcoin?

By Michael Thorburn

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Bitcoin is a decentralized digital currency, known as a cryptocurrency, as it uses cryptography to keep it secure.

Bitcoin was created in 2009 by an unknown entity and - unlike government-issued currencies - is operated by a decentralized authority. Whereas as traditional currencies such as the dollar have physical coins and notes, there are no physical Bitcoins as they only exist in a digital format.

Abbreviated to BTC when traded, Bitcoin is acquired by a process known as mining and is not backed by any banks or governments. Although it is not considered legal tender in many parts of the world, it has grown in popularity and inspired the launch of many other cryptocurrencies.

How Bitcoin works

Bitcoin is the world’s largest cryptocurrency owing to its market capitalization. It is created, distributed, traded and stored using a decentralized ledger system, known as a blockchain. The Bitcoin system is a collective of computers or nodes that run its code and store its blockchain.

A blockchain is a type of database that stores data in blocks that are then chained together. Each block has a specified storage capacity and once its capacity is reached it is chained onto the previously filled block to form a chain of data, hence the name blockchain.

The blockchain system requires an enormous amount of computing power to record information with an irreversible timeline of data when implemented in a decentralised way.

As each block is filled it is given an exact timestamp of when it was added to the chain and is set in stone to become part of the timeline. The vast majority of cryptocurrencies use the blockchain system.

During its relatively short life, Bitcoin has experienced many cycles of boom and bust, and remains a popular investment instrument among traders and investors. The trading of Bitcoin is facilitated by a Bitcoin wallet, which is a physical or digital device that allows users to track ownership of coins.

Bitcoin is becoming more widely accepted as a method of payment for physical products or services and was one of the first digital currencies to use peer-to-peer (P2P) technology to enable instant payments.

Transactions are handled through the requisite hardware terminal or by the wallet address using QR codes and touchscreen apps. Bitcoin can be accepted as a form of online payment the same ways as PayPal and credit cards are.

Benefits of Bitcoin

Bitcoin is highly liquid

One of the biggest advantages Bitcoin offers as an investment opportunity is that it has high liquidity, meaning that it can quickly and easily be sold to make cash available to the investor if needed.

Independence from central authority

Another big factor into why investors are keen to invest in Bitcoin is the fact that it is decentralized. Many investors consider investment in Bitcoin as an effective way of diversifying their portfolio and spreading their risk from other centralized investments.

Potential for high returns

Despite Bitcoins cycles of boom and bust, sentiment for Bitcoin is good and it is forecasted to reach new levels of growth. Providing high returns for investors, particularly for those who invested early at low prices.

Drawbacks of Bitcoin

Is considered highly volatile

Historically, Bitcoin has experienced several booms and crashes, this coupled with the uncertainty about its future or longevity can make it a highly volatile investment.

Not regulated by government

While this is seen as an advantage to some investors, other more risk adverse investors are wary of investing in a decentralized currency that has no government regulations or offers legal protection against transactions.

Limited use

Although the number of organizations that accept Bitcoin as a method of payment is growing, it still has a long way to go be seen as a replacement for traditional fiat currencies.

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Topics:
Cryptocurrency
Blockchain

Author: Michael Thorburn

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.