The penny drops
The use of Bitcoin has mystified many for years but its increasing popularity and value has seen rising government interest. Here are its pros and cons
Continued surge in Bitcoin value sparks interest, prompts governmental crypto plans
What is Bitcoin?
Bitcoin is an open source and virtual currency developed through an encrypted algorithm. The Bitcoin is derived from the ‘bit’ representing the smallest unit in the computer data storage and the ‘coin’ directly relates to the word coin. The Bitcoin that emerged in 2009 was for years believed to have been developed by a programmer named Satoshi Nakamato. However, Craig Steven Wright, an Australian computing expert, has suggested that he developed Bitcoin and has been hiding behind the Nakamato name, but the issue of who actually developed Bitcoin is still a mystery.
How is it produced?
Bitcoin production is called mining. Bitcoin is produced over an opensource coded algorithm using computer graphics processors (GPUs). Extracting Bitcoin, that is, mining a bit of Bitcoin is not the only goal of mining. Mining is the process of performing computation using computing power, safeguarding the system network and synchronizing every user on the system. Since the system can not be controlled from a single center, jobs like operating the process everywhere Bitcoin is used and watching the system have to be done by someone for a cost. People who do this job are called miners.
How is the cryptocurrency’s value determined?
Essentially, demand conditions decide its value. The first factor that affects the price of Bitcoin is the limited amount: there are only 21 million pieces in the market, which inevitably increases its value. Secondly, there is thought to be no limit to the potential value increases of Bitcoin. Thirdly, it is possible to transfer Bitcoin as a payment system. The fourth factor is people’s trust, which increases the number of firms that accept Bitcoin. Therefore, this increased interest in Bitcoin raises its value. The fifth factor is that Bitcoin is starting to be recognized by governments. This provides a legal basis and contributes to an increase in trust. Lastly, and most importantly, Bitcoin is independent of macroeconomic factors. The fall or rise of a country’s currency can affect other countries, but such occurrences have no effect on Bitcoin.
How is Bitcoin used?
Bitcoin allows anyone with an internet connection to make and receive payments like a credit or debit card. However, it basically differentiates from credit cards on one crucial point: there are no commission fees charged for purchases made with Bitcoin. Bitcoins can also be exchanged between users. But, currently, Bitcoin ownership is largely used for speculative purposes. Many people only use Bitcoin to get a return on investment and after each transaction they eventually turn it into their own currency.
How widely used is Bitcoin?
Jameson Lopp, the chief programmer of Blockchain security company BitGo, estimates that Bitcoin is currently ranked 32nd in the world economy in terms of currency value in circulation. According to its current market value, Bitcoin comes before Singapore and South America and just behind Finland and the United Arab Emirates. Despite its recent decline in value, Bitcoin continues to dominate the crypto money market, with a 60% share.
Is Bitcoin considered an investment instrument?
Theoretically, just like traditional currency, Bitcoin exchange can be used as a means of wealth or as an accounting instrument. But it is not used as a traditional currency because of its volatility. So many institutions have not yet formed a clear policy on Bitcoin. While some investment banks allow their customers to trade on Bitcoin, a significant portion prefer to approach it with caution.
What are Bitcoin’s advantages?
It is not influenced by the economics of any country because it is not connected to the central bank of any country, so the fluctuations do not depend on any person or state. Setting up a Bitcoin account is relatively simple compared to opening a bank account. There are no transfer fees. Bitcoin transactions take place within minutes no matter what time of day or night, week or weekend. In this regard, Bitcoin is the fastest currency transfer tool.
What are its risks?
Bitcoin allows illegal money transfers because the sender and receiver’s identity information can be kept confidential. It’s easy to lose Bitcoin. There is no mechanism in the Bitcoin system that can be used to recover the lost or seized Bitcoin wallet. For this reason, many users keep Bitcoins on hard-disks that are not connected to the internet. The floating currency of Bitcoin is a disadvantage beside its advantages. Its value can rise rapidly and fall at the same speed.
How do governments and central banks approach Bitcoin?
Some countries prohibit it while others support it. For example, the US has accepted it for commodities, while Japan has approached it positively, but has not yet been accepted it as legal tender. To be accepted, a country’s tax legislation must view Bitcoin positively.
What does the recent volatility in value point to?
Many people bought this currency for speculative purposes because Bitcoin was appreciating. For the same speculative reason, a significant decline in the value of Bitcoin was observed. The recent sales wave began with many users turning to Bitcoin Cash, one of the newest currencies. The developers of Bitcoin Cash, which emerged in August and is said to soon replace Bitcoin, received considerable backing from the community.