Bitcoin Series: What is Bitcoin?
In our Friday series, we’re going to take a deep dive into specific topics related to investing. Our first topic - which we will cover for the next several weeks - is Bitcoin (BTC). Our goal with this weekly series is to familiarize readers with BTC and to address common anti-BTC arguments.
What are cryptocurrencies?
As their name suggests, cryptocurrencies are digital currencies secured by some level of cryptography. Cryptographic security provides, amongst other things, anonymity and protection against counterfeiting and double-spending. Many emerging cryptocurrencies are run on decentralized networks using blockchain technology as a distributed ledger system. In the last 10 years, the number of cryptocurrencies available has skyrocketed. However, the cream seems to be rising to the top, as a very small number of these digital assets - including BTC - dominate the crypto market.
What is Bitcoin?
First, it’s important to note that Bitcoin (capital B) is commonly used in reference to the cryptocurrency’s protocol, software, and general community while bitcoin (lowercase b) is used in reference to the actual currency supported by said protocol. Bitcoin (capital B) is a decentralized cryptocurrency created by an unknown person or group called Satoshi Nakamoto. Because Bitcoin is decentralized, it does not have a central bank or administrator, and can be sent from user to user on a peer-to-peer network without the need of a third party. Transactions are verified by a large and distributed network of nodes before settling on a public ledger known as the blockchain. Bitcoin is a programmatic cryptocurrency with several important built-in features, including a hard cap on the number of bitcoins that can be created (21 million) and set “halving” events in which the reward provided to miners for creating new coins is cut in half. In order for a new bitcoin to be created, it must be “mined” digitally from the blockchain, which is why many refer to bitcoin as “digital gold.” A bitcoin can be obtained through mining or purchasing on any of the growing number of exchange platforms (for example, Coinbase). Bitcoin is becoming extremely accessible and in some cases you can even add bitcoin to your IRA or trust accounts.
How is it different from other cryptocurrencies?
While other modern cryptocurrencies emulate Bitcoin in some respects, there simply have been none that have achieved such wide public and institutional adoption that offer any substantial improvement of BTC technology. The network effect is real, and because Bitcoin was early on the scene, it’s had more time to gain traction. In addition to gaining a larger following, longer time in the game has allowed the Bitcoin protocol to be rigorously tested and stressed. Any software engineer knows, if you want to find bugs in a program, let as many users as possible run your code as many times as possible. Over time, the protocol has become stronger and, as importantly, grown and become more distributed across the globe. In addition to these things, built-in features of Bitcoin strengthen its use as a store of value, including:
There is a fixed supply (21 million coins), which reduces vulnerability to inflation.
The amount and velocity of new coins entering the market is relatively controlled via the blockchain protocol.
The Bitcoin protocol is decentralized, limiting the potential influence of a small number of powerful individuals/institutions.
Common arguments against BTC:
The price is too high (“I’ve missed the boat”) and/or too volatile
BTC is not physically backed by anything
BTC is used primarily by criminals for illegal activity
BTC is not a transactional currency (cannot be used to buy everyday items)
BTC uses too much energy (“It will melt the oceans”)
Governments will not allow it or will heavily regulate it
It’s easy to lose access to BTC wallet
As we said above, we plan to address each of these arguments, one at a time, over the next several weeks. We hope that our weekly posts will encourage readers to learn more about this emerging technology.
Happy Friday everyone - get after it this weekend!
Brandon and Dan
Disclosure: The authors of this writing hold positions in cryptocurrency mentioned in this article. That cryptocurrency is Bitcoin. The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.