What is bitcoin

Investors and journalists compare today’s fashion for investing in cryptocurrencies (such as Bitcoin) to the American gold rush in the mid-19th century. Others compare the mania for digital currency to the Dutch tulip craze in the 18th century.

Time will tell how long bitcoin and similar digital currencies will last, whether they will become the new gold standard or fade into oblivion just like the tulip craze has gone in Holland.

 

Digital currency

Digital currencies, or cryptocurrencies, are electronic monetary units that are generated by networks of computers and that are used instead of traditional currencies.

Paying with digital currency is not the same as paying with a credit or debit card, PayPal or ApplePay – all of these payment systems turn to traditional currencies such as US dollars, British pounds and Chinese yuan.

A unit of digital currency has a value that is determined in the process of exchanging traditional currencies and goods for units of digital currency on special currency exchanges on the Internet, such as BitPay. The work of these exchanges is somewhat similar to PayPal, but is in no way associated with this company.

The value of traditional currencies, commodities and gold is determined based on national and international banking standards.

Digital currency generation

Cryptocurrency is generated by a distributed network of computers united in a closed Internet community; computers execute a set of complex cryptographic algorithms, resulting in cryptocurrency in the form of digital monetary units. They can only be paid within digital communities; individuals and organizations can open accounts (so-called wallets) in specialized communities.

Community founders limit the amount of currency that can be generated by computers that support community transactions. The collective event to create a currency for the community is called the Initial Coin Offering.

Bitcoin is the most popular cryptocurrency, and at the same time it is one of the first cryptocurrencies for which a certain release limit was originally set.

A person known under the pseudonym Satoshi Nakamoto organized this cryptocurrency and founded the technology for its generation and management, in 2008 Nakamoto set the maximum number of bitcoins generated by a distributed network of computers at 21 million. Such a restriction on the supply of bitcoins ensures the demand for a monetary unit, which, as a result, grows in price.

bitcoin price

At the end of August 2017, the established market value of bitcoin was almost $5,000 per bitcoin. This is much higher than the price of gold, which at that time was about $1,300 per ounce.

However, 2 weeks after this peak, the price of bitcoin fell to about $3,000.

Those who invested real money in bitcoin in mid-August and did not exit the market before the fall lost about 40% of their investments.

By virtue of its status as the world’s most popular digital currency, bitcoin has become a standard in its own right, as have the well-known currency exchanges on Wall Street, London, and Japan.

At the same time, the bitcoin exchange rate falls when problems arise in the markets of other digital currencies. For example, at the end of August, bitcoin fell sharply as other cryptocurrencies lost the support of the Chinese government after a period of frighteningly explosive growth in China during 2017.

The Chinese government was afraid of the development of complex financial pyramids associated with cryptocurrency exchanges, which had their own monetary units like bitcoin.

As a result, the government of the country ordered the closure of exchanges such as BTCC, Okcoin and Huobi by the end of September 2017. This created a panic on all the world’s digital currency exchanges, which led to a rapid fall in the price of bitcoin.

Since bitcoin has exhibited a volatility not seen in gold and traditional currencies, its chances of becoming a global standard in the foreseeable future have become significantly lower.

Bitcoin Security

Since 2010, there have been about a dozen hacks of cryptocurrency exchanges. Losses run into the hundreds of millions of dollars.

On the other hand, traditional banks and financial institutions have lost billions of dollars over the same time due to the actions of cybercriminals.

Programmers and members of the cryptocurrency community are hard at work to identify and fix vulnerabilities in their respective blockchain networks.

If the blockchain becomes an acceptable currency for traditional merchants, then complex computer algorithms can take over some of the functions of the world’s central banks.

In terms of personal security, every user investing in bitcoin is advised to install a security class solution to protect against Internet threats before accessing financial information and conducting transactions.