The finance world is finally abuzz with news of bitcoin and other cryptocurrency. What are cryptocurrencies, and what do potential investor need to know about them? This bitcoin essay offers a brief background of bitcoin and other cryptocurrencies, also referring to the blockchain software that underlies them. Then, it explores what financial analysts say about the viability of bitcoin as an investment. Finally, it will explain how and why people purchase bitcoin, as well as how bitcoin can be used as both currency or as investment.
Because they are taking the financial world by storm, is important to learn about bitcoin and other cryptocurrencies. This paper will explain bitcoin in simple terms anyone can understand. Ultimately, this essay will show that bitcoin is a risky but potentially lucrative investment. Although the numbers of “bitcoin billionaires” is low, there are a lot of ordinary people who have made a lot of money by purchasing cryptocurrencies.
Table of Contents
A. Brief definition of bitcoin and cryptocurrency
B. Brief overview of how bitcoin evolved and what it is used for
C. Thesis: Bitcoin has become an attractive investment because it allows people to bypass government regulations, but the future of cryptocurrencies is uncertain.
II. Why is bitcoin popular
B. Blockchain, briefly
C. Other cryptocurrencies
III. How does bitcoin work?
A. How to buy, sell, and trade bitcoin
B. How to invest in cryptocurrencies in general
IV. Financial outlook
A. Skyrocketed in value, causing many people to become “bitcoin billionaires”
B. Slumping now due to fears about government interventions.
Is Bitcoin Really a Good Investment?
Bitcoin is a revolutionary type of currency that is not tied to any one state, government, bank, financial system, or even to a tangible like gold.
By now, bitcoin has become a household word. Just a few years ago, bitcoin was only known by a select few, a cadre of geeks and pioneers from around the world drawn to the appeal of an open source, unregulated, decentralized, and even socially conscious financial system. Liberated from the typical features of a capitalist market, bitcoin is based on algorithms. The underlying principle of bitcoin and other cryptocurrency is the blockchain, so-called because each transaction is processed and recorded in bits, adding another link to a giant global chain. Bitcoin can be used to make anonymous peer-to-peer digital transactions, and is used in this way. However, the more people who bought bitcoins, the greater the demand for its currency. As per the law of supply and demand, the value of bitcoin skyrocketed in a number of years to the point where it is now worth well over ten thousand dollars. Thus, bitcoin is now viewed almost like an ordinary investment.
Unlike regular currencies like the Dollar, Yen, or Pound, bitcoin is not tied to a nation or to any bank. It is unregulated, and bitcoin transactions are totally free as well as private. Bitcoin can be used as virtual cash, to buy things online, or it can be traded like a stock on what are known as bitcoin exchanges (“Bitcoin Exchanges,” n.d.). Yet there is so much more to bitcoin than just currency. Because it transcends the capitalist and neoliberal global market system, bitcoin is practically a philosophy. Also, bitcoin can potentially change the way people value goods and services. The value of a bitcoin or any other cryptocurrency lies mainly in user behavior. As such, bitcoin has transformed the ways people can conduct their financial transactions and place value on the goods and services they trade.
Bitcoin has become an attractive investment because it allows people to bypass government regulations, but the future of cryptocurrencies is uncertain.
The creator of bitcoin remains anonymous but uses the alias Satoshi Nakamoto (“What is Bitcoin?” n.d.). Nakamoto created bitcoin in part to resolve the challenge of creating a digital currency that was totally liberated from the traditional banking system. As Wallace (2011) points out, the creation of bitcoin coincided with diminished trust in the government and Wall Street. Also, bitcoin succeeded where other technologies had failed. Until bitcoin, all other digital currency models remained tied to the known currency markets, systems of exchange, and methods of conducting transactions. Nakamoto changed everything by thinking outside of the box.
What made bitcoin different was the block chain. The block chain works similar to the way torrents work, in that multiple users around the world participate in the virtual chain. Rather than relying on a centralized system or server, there is a potentially infinite number of ordinary users with desktops, laptops, or more sophisticated machines like servers. Each link in the chain conducts algorithms, generating more bitcoin as currency as a result. When any bitcoin transaction is completed, it becomes an immutable member of the block chain.
Bitcoin became popular because of several reasons. One reason is that bitcoin and other cryptocurrencies can actually be used to make anonymous peer-to-peer transactions. In fact, bitcoin was initially designed solely with this function in mind (Hawkins, 2017). Making online purchases with bitcoin would have been like using a far more anonymous version PayPal, one that does not require the user to link with a bank account or a credit card or give any personal information whatsoever. Using a “cryptocurrency” like bitcoin therefore allows for a tremendous amount of freedom and privacy. Also, there are no foreign transaction fees, no exchange rates, and no credit card transaction fees when using bitcoin. Bitcoin can therefore be beneficial for vendors and consumers. One of the most notable and obvious uses for bitcoin was to conduct transactions on the “dark web,” where consumers can seek and find all types of contraband (Cox, 2015). Another notorious use for bitcoin is as a means of money laundering.
Yet from this initial purpose as a means to make anonymous and secure transactions, bitcoin has taken on a life of its own. Bitcoin is no longer just about making online purchases on the “dark web.” As bitcoin’s popularity grew, so did its functionality. Bitcoin became noticed because of its unique features, its ability to reflect supply and demand in an organic way, its blockchain technology and its relatively tight security.
Another reason why bitcoin and other cryptocurrencies have become popular is that they are detached from the international monetary exchange system. Cryptocurrencies are insulated from the fluctuations that take place in financial systems, and are especially attractive to buyers in countries that have volatile or weak currencies, like China. For this reason, governments are already trying to crack down on cryptocurrency exchanges (Hawkins, 2017). Relatively few people have bitcoin now, but if more people invest their money in bitcoin, the less the governments can regulate their own financial systems, including systems of taxation. Governments are likely to monitor bitcoin in the future, and disguise any attempt to shut down bitcoin as a means of protecting the public. Yet like file sharing online, cryptocurrencies cannot be fully regulated or monitored in any meaningful way in the long run, which is why the cryptocurrency model remains extant. Bitcoin and other cryptocurrencies use open source technology, and the block chain system makes it so that it is difficult to cut off the head of the hydra—there is no hydra, no centralized system as there would be with a bank or any formal organization.
Finally, many people are attracted to bitcoin because it has a rogue character. Bitcoin and cryptocurrency reflect an anarchist, pirate trend in politics that can be disparaging towards neoliberalism, capitalism, and other features of the global marketplace. Bitcoin is based on open source software, which by definition eschews intellectual property concepts. Cryptocurrency allows people to conduct transactions that are off the typical financial grid, which means not only that people in developing countries stand to benefit but anyone who does not perform well under the prevailing financial model.
The decentralized, slightly risky, and “cool” factors make cryptocurrencies exceedingly popular, but they are creeping into the mainstream. All mainstream news sources have been reporting on cryptocurrencies because their value has gone up exponentially over the past year or two. Bitcoin and cryptocurrency have been described of in near-religious terms, too. The first fifty bitcoins are known as the “genesis block,” and users of the currency are described as “evangelists” and communitarians who genuinely want to make the world a better place by creating a new means of conducting business transactions (Wallace, 2011). Without a doubt, bitcoin has transformed the way people around the world can envision business and economics.
Since the advent of bitcoin, a slew of other cryptocurrencies have appeared on the market. All are based on similar concepts using the block chain. Cryptocurrencies other than bitcoin include litecoin, ethereum, zcash, dash, and ripple (Bajpai, 2017). Each of these different currencies may present advantages or disadvantages, including different prices or value for the currency, and different features including how and where they are used, and especially how their blockchain algorithm is designed. Also, these cryptocurrencies are somewhat like traditional currencies in that each may have a different value. Unlike regular currencies, their value is determined by the blockchain and not by GDP, world trade patterns, and other macroeconomic forces. Each cryptocurrency has unique features, particularly when it comes to security and encryption—the cornerstones of cryptocurrency.
Bitcoin does not work like other currencies. For one, bitcoin is essentially a software system based on the blockchain principle. Bitcoin and other cryptocurrencies are only as good as their developers. As open source software, the bitcoin technology can be enhanced and improved upon regularly. With bitcoin, the algorithim releases new bitcoins at a rate that is regular and systematic to avoid hyperinflation (Wallace, 2011).
Second, bitcoin is not tied to any currency like the United States dollar. It is not tied to gold. There is no central bank that can artificially regulate how much money is being printed or how a currency is valued. Imports and exports, inflation rates, interest rates, and real estate markets mean nothing to cryptocurrencies. Bitcoin might function as a currency, but it is a lot more than that. The basic elements of bitcoin are the mining process and the block chain concept.
Bitcoins are “mined” by people who participate in the process using special hardware and software, and also a working knowledge of how the system works. Ordinary people can participate in the mining process. However, most people who use bitcoin do not actually participate in the mining. Most people buy and sell bitcoins just as they would other currencies, using special exchanges known as bitcoin exchanges or cryptocurrency exchanges. The most famous cryptocurrency exchange is Coinbase, but others have proliferated since cryptocurrencies have become more popular. Although cryptocurrencies themselves have few security concerns, the exchanges and the wallets have been known to have security problems that leave them open to hacking (“What is Bitcoin?” n.d.).
A bitcoin wallet is where an individual’s bitcoin stash is stored. Like any virtual or cloud-based wallets, there are different software systems that serve as wallets, many of which can be used to store several different types of cryptocurrencies. It is important to choose a reliable bitcoin wallet and exchange service because unlike a traditional bank, a bitcoin wallet is not insured or backed by any government.
All cryptocurrencies are based on the blockchain. The blockchain has been described as an “incorruptible digital ledger,” (“What is Blockchain Technology?” n.d.). Algorithms are used to encode a transaction, and each transaction is added to the blockchain. The chain reaction is created by factors like supply and demand fluctuations. At the root of it all, propelling cryptocurrency, are mathematical equations. The bitcoin miners devote their software, hardware, and their time to solving these problems to generate more bitcoin and participate in the growing system of cryptocurrency creation and circulation. The block chain also prevents fraud by acting as a digital leger that keeps track of all transactions. Although anonymous, each transaction and mining is validated via cryptography. The blockchain is “robust” because it is decentralized and has built-in redundancy; it is also ‘transparent and incorruptible,” (“What is Blockchain Technology” n.d.).
Bitcoin has experienced a tremendous and almost frightening level of growth since it was first released in 2009, when it had almost no value (Wallace, 2011). By 2011, bitcoin achieved parity with the United States dollar, and as of December 2017, the bitcoin is worth almost $14,000. While bitcoin remains the dominant cryptocurrency, the other cryptocurrencies have gained traction.
The biggest uncertainty with the financial future of bitcoin is whether governments and other stakeholders might attempt to seriously curtail it. Already, the value of bitcoin and some other currencies have dropped since news that China and South Korea have determined to regulate cryptocurrency. Even Australia’s government has expressed interest in cracking down on cryptocurrency (“What is Bitcoin?” n.d.). Chaparro (2017) also notes that as cryptocurrencies become more mainstream, they are losing their appeal as being philosophically opposed to the traditional financial markets. If bitcoin and other cryptocurrencies become bought and sold like any other commodity, stock, or currency, they lose their communitarian idealism that propelled the system in the first place. The loss of its innocence might lead to a dip in value, too.
Blending software, sociology, and economics, cryptocurrency has radically transformed the ways people think about markets, money, and finances. Cryptocurrency is unlike any other currency that has ever existed, but it also differs considerably from other alternatives to money like bartering. Because cryptocurrency is digital, decentralized, and unregulated, buying and selling is fairly risky. Yet in some ways, cryptocurrency is no riskier than any other investment. A real estate investment can go sour after a natural disaster hits. Stocks can plummet. Nothing in life is certain, and neither is cryptocurrency.
Cryptocurrency promises to liberate people from the shackles of traditional banking. Appealing to mavericks and geeks alike, cryptocurrency allows people to conduct financial transactions totally independently of government and banking oversight. This obviously presents problems in terms of raising money for taxes, or paying banks their fees. Eventually cryptocurrencies will draw enough attention from the United States government, the World Bank, and other major institutions. If and when a bitcoin crackdown does occur on a global level, the value of cryptocurrencies may fluctuate more than ever before. In the meantime, cryptocurrencies remain a viable alternative to hard currencies. Cryptocurrencies make it easy for people from all over the world to do business with one another easily and effortlessly, anonymously and securely.
“Bitcoin Exchanges,” (n.d.). https://bitcoin.org/en/exchanges
Chaparro, F. (2017). Crypto insider. Business Insider. http://markets.businessinsider.com/currencies/news/bitcoin-cryptocurencies-today-december-28-1012273887
Cox, J. (2015). The dark web as you know it is a myth. Wired. https://www.wired.com/2015/06/dark-web-know-myth/
Hawkins, A. (2017). Meet the millennials making big money riding China’s bitcoin wave. The Guardian. https://www.theguardian.com/technology/2017/apr/11/meet-the-millennials-making-big-money-riding-chinas-bitcoin-wave
“The Six Most Important Cryptocurrencies other than Bitcoin,” (2017). Investopedia. https://www.investopedia.com/tech/6-most-important-cryptocurrencies-other-bitcoin/
Wallace, B. (2011). The rise and fall of bitcoin. Wired. https://www.wired.com/2011/11/mf_bitcoin/
“What is Bitcoin?” (n.d.). CNN. http://money.cnn.com/infographic/technology/what-is-bitcoin/
“What is Blockchain Technology?” https://blockgeeks.com/guides/what-is-blockchain-technology/
“What is Cryptocurrency: Everything You Need to Know.” (n.d.). https://blockgeeks.com/guides/what-is-cryptocurrency/
This bitcoin essay explains bitcoin in plain language, covering the history of bitcoin and how it works. Bitcoin has revolutionized the ways people think about financial transactions and global markets. Capitalizing on open source software systems and the philosophy of communalism, bitcoin and other cryptocyrrencies allow people to conduct transactions without banks, without a paper trail, and without buying into the capitalist market economy.
Other bitcoin essays could examine some of the subjects mentioned in greater detail. For example, it would be interesting to learn how bitcoin is used on the gray and black markets around the world. It is well known that bitcoin has been used as a dark web currency and for money laundering, but because of the anonymity of bitcoin, it may be difficult to discover whether non-state actors like terrorist organizations use bitcoin. The potential list of topics on bitcoin can span a wide range of issues, as this is a multidisciplinary topic.