Bitcoin Explained: Everything you need to know about Bitcoin
January 30, 2021
2 min read
Since the start of the pandemic, bitcoin’s value has increased by 700% and it exceeded $40,000 for the first time earlier this month. This recent surge reflects growing confidence among mainstream investors, financiers and central banks in the future of bitcoin and similar cryptocurrencies within the global financial architecture.
Understanding why bitcoin matters starts with a fundamental knowledge as to what bitcoin is and why it is being bought. A cryptocurrency is a type of currency characterised as being digital, encrypted and decentralised. Cryptocurrencies are underpinned by a certain technology known as blockchain, i.e. digital ledgers enforced by a global network of computers that record and encrypt all cryptocurrency transactions. This structure also makes it impossible to counterfeit or double-spend cryptocurrencies.
Representing more than 68% of all cryptocurrencies in existence, Bitcoin is arguably the most well-known and popular of them all. Since its inception as the original cryptocurrency twelve years ago, 18m bitcoins have been generated by “miners” who maintain its blockchain. Critically, this system is decentralised and therefore has no controlling institution. Whereas, traditional fiat currencies (like British pound sterling) are backed by governments and typically overseen by an independent central bank such as the Bank of England.
What's the big picture effect?
Fiat currencies can, if necessary, be manipulated as part of an economy’s monetary policy. As a result, bitcoin has so far been discarded by key financial players as nothing more than a virtual “snake oil”, something with a false value, used only as an anonymous medium of exchange by fraudsters and terrorists… that is, until now (possibly)!
There is a growing belief that if enough bitcoin is owned by governing institutions and powerful stakeholders alike, it could be regulated in an unconventional sense. The recent price rise thus reflects a wider involvement of traditional money managers and financial institutions. In fact, since October 2020, more than £2.2bn has been invested into Grayscale Bitcoin Trust: an investment fund tracking the value of bitcoin. Bitcoin is also being perceived as a potential counterbalance to the expected inflation of fiat currencies as economies rapidly recover following Covid-19 vaccine rollouts.
However, what makes bitcoin riskier in this respect is its volatility, inherent in its decentralised nature, uncontrollable in any event. True, whenever any stock or commodity value reaches new heights, there should always be a touch of scepticism or caution. Indeed, market bubbles triggered by speculative buyers are not uncommon at all. Bitcoin has been here before and found out the hard way. At the start of 2017, one Bitcoin was valued at less than $1000, climbing to $17,000 within 12 months, only before crashing down to $3000 within the first few weeks of 2018.
Three years on from that plummet, there is a feeling this time is different. Yet while bitcoin’s current value means it still should never be left in landfill, it equally should not be relied upon as part of the future financial architecture.
Report written by Seb Stacey
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