From tech titans to the daily news, there is a lot of buzz about Bitcoin. While the opinions on its utility, viability and value are varied, it is important to understand some basics about Bitcoin
- Decentralized. Cryptocurrency is decentralized digital money that is based on blockchain technology. Decentralized means that there is no central governing authority, like the U.S. federal government, that is tasked with managing and maintaining the value of cryptocurrency, like Bitcoin.
- Bitcoin and Blockchain. Bitcoin was the first cryptocurrency. It was founded by Satoshi Nakamoto in 2009, who described it is “an electronic payment system based on cryptographic proof instead of trust.” Cryptographic proof comes from transactions that are verified and recorded in a form of program called a blockchain, which is a public ledger of all cryptocurrency transactions. The verification process is carried out by independent verifiers or validators in exchange for cryptocurrency (these parties are often called “miners”). The mining process is how new units of cryptocurrency are issued.
- Limited Supply. The maximum number of Bitcoins that will be generated through mining is 21 million. This limited supply, coupled with increasing institutional demand and acceptance, are reasons why some people believe the value of Bitcoin will increase over time. It is also important to note that unlike Bitcoin, there are other cryptocurrencies that do not have a limited supply.
- Halving. Bitcoins are issued by the Bitcoin network every 10 minutes in exchange for the mining efforts described briefly above. Roughly every four years, the number issued per block is cut in half. The number of Bitcoins issued per block has gone from 50 down to 6.25 per block as of May 11, 2020 and is projected to drop to 3.125 per block in 2024.
- Digital Wallet. Bitcoin is an intangible asset that you cannot physically hold or enjoy. Bitcoin is maintained solely in a digital medium and stored electronically in programs called wallets that are secured by passwords.
- Value and Volatility. Bitcoin’s value is derived from its use as a digital currency. It does not have any intrinsic value based on cash flows, corporate earnings or other similar metrics applied to stocks and bonds. In addition, Bitcoin is subject to incredibly large price swings, both upside and downside, that outpace even some of the most historically volatile stock markets, including 2008.
- Increased Acceptance. Almost daily, you will see a story about established institutions and wealthy investors taking an increased interest in Bitcoin with some taking large positions in Bitcoin as an alternative investment to gold.
Because this “digital gold” is still in its infancy, its value and long-term viability is the subject of considerable debate among financial advisors and economic experts. If you are wondering whether investing in cryptocurrencies like Bitcoin makes sense as part of your overall investment strategy, please consult your financial advisor so you can familiarize yourself with the risks of investing in this type of asset and have a better idea of the possible outcomes.