Bitcoin 101: Understanding The Origins Of This “New” Form Of Currency
A few weeks ago, I told readers that I will be dipping my toes into the cryptocurrency waters, starting with my premium subscribers. I also asked for feedback, and I appreciate all the comments and questions I received on the topic from everyone.
Today, I want to start from square one by talking about bitcoin… how it came to be, a little about the technology and ideas behind it, and what it could mean for the way we think about and use money in the years to come.
In the days (and weeks) ahead, I plan to dive a little deeper. And through this process, I’m planning to answer some of the most common questions people have.
I understand that cryptocurrency can be a polarizing topic. But my goal is simple… Whether you decide to invest in cryptocurrencies or not, I’m hoping you’ll walk away with a better understanding of this new alternative asset class.
The Mysterious Origins Of Bitcoin — And How It Works…
In August 2008, someone anonymously registered the bitcoin.org domain name. That was the first known appearance of the word “bitcoin.”
Then, in October 2008, a coder going by the name of Satoshi Nakamoto published a white paper describing the basics of bitcoin. He is said to have been writing the computer code for a year and a half.
In January 2009, the world’s first cryptocurrency — bitcoin — was born.
Bitcoin is purely digital. It’s just zeros and ones (known as “bits”) on a computer network… hence the name “bit”-coin.
Being purely digital isn’t as radical a departure from today’s currency as it sounds. In fact, it’s estimated that 92% of the world’s currency is digital. In other words, only about 8% of fiat currency is physical money.
Think about the U.S. dollar… When you swipe your card to purchase groceries, or even write a check, no physical bills exchange hands. The value exchange (money for goods) happens behind the scenes on a network with your bank communicating with a merchant provider who then communicates with another financial institution. And then everybody hopes to collect as some point.
Think about how convoluted this is, and how easily it can be (and is) defrauded. We’ve all probably had a check “bounce” — whether it was one we wrote or one that we were cashing.
If we pay with a credit card, there’s no verification that those goods will actually get paid for by the card holder. Sure, the store still gets its money and doesn’t care, but now the financial institution that issued the credit card must collect the funds.
Bitcoin — and cryptocurrencies — solve a lot of these problems.
Bitcoin exists entirely outside of the traditional banking system. It doesn’t rely on banks to manage accounts or verify transactions. As a result, there are no middlemen, such as JPMorgan Chase or Visa.
Bitcoin is transferred via a peer-to-peer network, which doesn’t have a central computer server or authority. Unlike dollars, bitcoins aren’t a central bank’s liability (or “IOU”) — a characteristic it shares with gold, which means it isn’t a liability of the central bank either.
But bitcoin is much easier to transfer than gold…
Another characteristic it shares with gold is that there is a limited supply. Gold is scarce. Miners continue to extract more, but the total supply is limited by nature. The Earth’s crust only holds so much gold.
Bitcoin’s supply is limited by computer code. Ultimately, there will be 21 million bitcoins. No more, no less.
Bitcoin is also fungible: one bitcoin is equivalent to any other.
This eliminates the need for currency conversions. We don’t have to worry about how the U.S. dollar stacks up to the euro or the peso when traveling or when companies purchase product from overseas.
This standardization makes it so we can easily measure the value of goods and services. And although bitcoin is far from universal, the attributes of bitcoin make it a good medium of exchange.
More and more businesses and even countries are recognizing bitcoin as a legal payment method and currency. In April 2017, the Japanese government officially recognized bitcoin as legal tender, and just last year (2021) El Salvador adopted bitcoin as a recognizable form of payment.
Overstock.com accepts bitcoin, as does Microsoft’s Windows and Xbox online services. You can even pay for DISH Network’s satellite television service with bitcoin.
Granted, currently, bitcoin is not an ideal medium of exchange because its price is so volatile. But over time, if bitcoin’s volatility moderates and more merchants accept it as payment, it will better serve as a medium of exchange.
Like I mentioned earlier, I’ll have more to share with you in the days (and weeks) to come. So consider this just the first in a “primer” series on crypto.
Remember, my goal is to give you a foundation that we can build off of… One that makes you more educated and confident about one of the most talked-about subjects in finance…
In the meantime, if you’re already familiar with cryptocurrencies, then you need to check out my latest prediction for 2022…
Last year, we told investors we were bullish on Ethereum — and it went on to deliver 400% gains. My team and I predict cryptocurrencies will surge again in 2022… but the big winner won’t be Bitcoin, Binance, or Ethereum. We think another crypto is now a better bet for new investors. It is 321 times faster than its prime competitor and we think it could surpass it in value…