Demystifying Bitcoin — what is the hype about?
Bitcoin has been on a phenomenal rally since the last year, creating a lot of hype around it. In the past year, its price went from a low of $5000 to a high of 40,815 $ giving a whopping 322.85% return despite the global pandemic. This bull run piqued the interest of many so, let's look at this cryptocurrency to understand more about it.
What is Bitcoin?
Bitcoin is a digital currency that is powered by blockchain technology. It has the following features:
1) It is decentralized, meaning there’s no central authority to control it.
2) Anyone can transact with it from anywhere in the world.
3) Transactions are anonymous.
4) All transactions are recorded on the blockchain network making it difficult to alter or hack therefore secure.
While we are discussing blockchain, let’s understand how it works. Here’s a simple analogy: picture a train formed by connecting various coaches, replace the coaches with blocks containing information, and you get a blockchain.
Each block contains information, a unique fingerprint called a hash, and the address of the previous block. Any changes to a block will change the address and hash value, thus it no longer remains part of the chain. Also, you would have to change it across all computers in the network which is difficult. In a nutshell, information once written cannot be modified and you would have to change it across all the devices in a network, which is a herculean task.
In the bitcoin blockchain, each block contains information about the sender, receiver, and the amount transferred.
How is it valued?
Now that you have understood what bitcoin is and how it differs from traditional currency. Let’s understand how it derives its value.
1) Bitcoin has a limited supply, only 21 million bitcoins exist out of which 18.5 million have already been mined. This affects the supply-demand dynamics and drives prices.
2) Value of a currency depends on the trust that people have in it and its usability, in bitcoin’s case it has a relatively small but growing user base that can help stabilize its price.
Why is it rising so much?
Bitcoin may seem like an ideal currency: decentralized, unaffected by any policy/economic changes, and with no cons, right?
No, bitcoin is a highly volatile currency experiencing massive swings in its price. In fact, it fell 45% from its peak in 2017, making it a risky investment option. Also, this makes it difficult for widespread adoption as a payment method.
This begs the question why is it rising so much?
For starters, the 2017 rally was because of retail investors driven by the fear of missing out (FOMO) not looking for a long term, and once the profit booking started bitcoin tanked.
This time it’s different because of the following reasons:
1) Institutional investors have taken part in it and are considering it as a serious investment option and a hedge against uncertainties in the market because of the pandemic.
2) Because of the pandemic, many countries printed vast sums of money for the stimulus package to keep the economy afloat, causing a rise in inflation, so many preferred bitcoin as it remains unaffected.
3) Companies like Paypal, Square, Microsoft Xbox have started adopting it, increasing confidence in the currency.
4) The upcoming applications of blockchain to solve real-life problems are making people optimistic about cryptos and increasing interest in bitcoin.
5) Last but not least in India, the supreme court lifted the ban on cryptocurrency paving the way for startups and people to invest in bitcoin.
While no one can predict whether bitcoin will rise further or fall, one thing is sure that cryptocurrency and blockchain have the potential to transform various aspects of our life in the future.
A small message for you: If you are interested in learning more about blockchain and allied technology then we have good news for you, we are building a global decentralized blockchain community to educate people and develop some cool open source projects to solve real-life problems. The best part is it is free, and anyone from anywhere can join it. You can register by clicking here.
Disclaimer — This article is written for educational purposes only and should not be considered as investment advice. Take investment decisions based on your analysis and risk capacity.
