Can you explain what "bitcoins" are in simple terms?



What is the reason behind their high value and how did they become so expensive?

1) What are Bitcoins

In simple terms, Bitcoins operates like digital money or online cash. You can think of Bitcoin as a computer file which can be stored in a 'digital wallet' app on a smartphone or computer. People can send Bitcoins (or parts of one) to your digital wallet, and you can send Bitcoins to other people. Every single transaction is recorded in a public list called the blockchain.

Bitcoins are not printed or coins, but are mined in a process where powerful computers perform complex calculations. There are a limited amount of bitcoins that can be created - the maximum is 21 million.

2) Why are Bitcoins so high in value

The value of Bitcoin is largely driven by supply and demand. The supply of Bitcoins is limited by its software to 21 million coins and, as of my knowledge cutoff date in 2021, over 18 million have already been mined. Demand, on the other hand, has increased significantly over the years as the concept of cryptocurrencies has become more widely acknowledged and accepted.

A few reasons Bitcoins are valuable:

a) Scarcity: Since only 21 million Bitcoins will ever be produced, this limited supply creates scarcity, which can increase value if demand rises.

b) Decentralization: It's not controlled by any government or central authority, which can make it attractive to people who are concerned about government control over traditional currency. It operates on blockchain technology, enabling transparency and protection from fraud.

c) Utility: It can be used as a digital currency for transactions, including cross-border transactions. This can be quicker and cheaper especially for large amounts because it doesn't go through traditional banking systems.

d) Speculation: Many people also buy Bitcoin as an investment, hoping that it will go up in value over time. This causes value increases, similar to investments in stocks.

3) How did they become so expensive

The price of Bitcoin has primarily increased because of the demand from people who see it as a store of value (like gold), or who believe that in the future, more people will want to use it for transactions.

Bitcoin also got a lot of media attention that helped increase demand. As more organizations started to accept it as a form of payment, or as an investment, it became more incorporated into the financial ecosystem. This brought a significant increase in demand with more people wanting to buy, hence driving the price up.

However, keep in mind that the value of Bitcoin can be very volatile, and it can go down as quickly as it goes up. It's therefore recommended to carefully consider the risks before investing.


How Bitcoin Works

Bitcoin operates on a technology called blockchain, which is essentially a public ledger containing all transaction data from anyone who uses bitcoin. Transactions are added to "blocks" or the links of code that make up the chain, and each transaction must be recorded on a block. But these transactions are not automatically added to the chain. They need to be validated by "miners."

Miners are people running high-powered computers that compete to solve complex mathematical problems to add a block to the blockchain. They are motivated to do this because they are rewarded with Bitcoin upon successful validation of a block. Once a block is added to the blockchain, it is publicly available for viewing and can't be altered, lending to the transparency and security of the Bitcoin network.

Bitcoins as Global Currency

A key reason why bitcoin has become more valuable is that it's considered by many as a form of "digital gold", or a kind of universal money that can hold value and be used to transact regardless of where you are in the world. Bitcoin is not tied to any single country's financial situation. It's a global digital currency that isn't regulated by any central authority or bank.

Bitcoin's Limitations

However, it's important to understand that while Bitcoin holds enormous potential, it also has limitations.

Firstly, as of 2021, Bitcoin isn't widely accepted for everyday transactions. While more and more businesses are beginning to accept Bitcoin, it's a small fraction compared to traditional methods of payment like credit cards or cash.

Secondly, Bitcoin is highly volatile. It's common to see the value of Bitcoin fluctuate wildly in a relatively short period of time, which can pose significant risks if you're considering it as an investment.

Lastly but crucially, while the decentralization of Bitcoin offers increased privacy and freedom from interference by financial institutions, it can also facilitate illicit activities like money laundering or the buying and selling of illegal goods. This has led to regulatory scrutiny in various countries, potentially limiting Bitcoin's wider adoption.


The Advent of Bitcoin and Its Impact

Bitcoin was introduced in 2009 by an unknown individual or group of individuals who went by the pseudonym, Satoshi Nakamoto. It was the first widely adopted cryptocurrency and remains the most valuable and influential in the market. Bitcoin essentially launched the global movement toward decentralization of finance through blockchain technology.

Over the years, Bitcoin has affected many areas in society:

Investment: It has become a new investment class, with both individual and institutional investors buying it as a speculative asset and as a hedge against traditional financial markets.

Transparency and Trust: Being built on a blockchain, every Bitcoin transaction is traceable, cannot be reversed, and doesn't need third-parties. This creates a level of transparency and security uncommon in financial systems.

Global e-Commerce: It allows users worldwide to perform peer-to-peer transactions, bypassing the need for middlemen like banks or payment processors. This can decrease costs and increase efficiency.

Financial Inclusion: In regions where access to conventional banking is difficult or impossible, Bitcoin offers an entry point to financial services, such as money storage and transfer.

Challenges and Criticism

Despite the potential benefits and significant influence of Bitcoin, it's not without its challenges and drawbacks:

Scalability: While the Bitcoin network is touted for its security and decentralization, it currently can't handle the volume of transactions that larger financial companies, like Visa, manage regularly. This limitation raises questions about its capability to become a truly global payment system.

Regulatory Concerns and Legal Issues: Because Bitcoin can be used with relative anonymity, it has been associated with illegal activities, such as drug trafficking or money laundering. Regulatory bodies worldwide are grappling with how to effectively oversee its use.

Environmental Impact: Mining Bitcoin requires a great deal of computational power, hence a lot of electricity. This has led to criticism about its carbon footprint.

Volatility: Bitcoin prices can fluctuate wildly, which can lead to substantial financial loss. This volatility can prevent its wide adoption for everyday transactions.

The Future of Bitcoin

While it's impossible to predict the future with absolute certainty, Bitcoin and other cryptocurrencies seem likely to play a significant role in coming years. However, the path won't be without obstacles.

Factors that will shape Bitcoin's future are increasing adoption, regulatory decisions, technological advancements, market speculation, and more. It will be fascinating to witness how Bitcoin and the broader cryptocurrency and blockchain industry evolves.

The English term "cryptocurrency" refers to a form of digital currency that relies on cryptography for its operation. In other words, the creation of currency is achieved through the use of cryptographic functions. Cryptocurrencies are characterized by their decentralized nature, which sets them apart from conventional money. Unlike traditional currencies that are printed by governments or financial institutions, cryptocurrencies are generated through the activities of users on a computer network.

One Bitcoin was valued at approximately 428 US dollars in the latter half of April 2016, with the exchange rate fluctuating around this value. The question arises: why is it so expensive? Let us explore three different perspectives to gain a better understanding.

The first perspective is based on the traditional explanation, suggesting that the very mechanism of currency issuance leads to its continuous appreciation.

The second perspective urges caution, positing that Bitcoin may be a massive scam, with an inevitable crash awaiting the strengthening of its exchange rate.

The third perspective offers a conspiracy theory, proposing that Bitcoin's high value serves as a testbed for the development of a global currency.

To put it simply, Bitcoin is the original digital currency, built on a secure payment system relying on cryptographic algorithms. Transactions between users are recorded in a decentralized database called the blockchain. Each user has a private key to prove ownership of their coins. Transaction confirmations are performed by miners, who engage in the process of mining and are rewarded with new coins. Cryptocurrencies offer several advantages over traditional payment systems.

Decentralization is a key feature, as the network operates on a peer-to-peer basis, without a central authority controlling it. This ensures constant availability and eliminates the risk of failure or hacking that can occur with centralized systems like banks. With cryptocurrencies, there are no intermediaries involved, and nobody can deny or seize your funds. As long as you keep your private key secure, your money remains yours.

The transparency of all transactions is another notable aspect. Every transaction ever made is recorded in the blockchain and is accessible to everyone. However, this transparency does not compromise the anonymity of users. No personal information is stored in the network, making it impossible to trace who sent money to whom. Users can create multiple addresses to receive funds and send money without revealing their identity.

Cryptocurrency transactions also have significantly lower fees compared to traditional systems, although the exact amount can vary depending on the specific cryptocurrency.

Despite these advantages, there are certain drawbacks to cryptocurrencies, especially in the case of Bitcoin. The cost of transferring Bitcoin has increased due to scalability issues and the concentration of mining power in large pools. Finding an exact explanation for the high cost of Bitcoin is challenging, but there are several factors contributing to it. These include the growing interest in cryptocurrencies, the expensive nature of mining, limited supply leading to gradual deflation, and speculative investments in the hope of profiting from price growth. As cryptocurrencies gain acceptance as a form of payment in various countries, their value continues to rise, fueled by a multitude of reasons.