What is Bitcoin?

Bitcoin is a digital currency that was created in 2009.  It is based on a 2008 white paper by a fictitious person named Satoshi Nakamoto.  That person’s true identity remains a mystery.  One of the unique aspects of Bitcoin compared to other currency is that it is not issued by a government authority or regulated.

There are no “physical” bitcoins, only balances kept on public ledgers stored in the cloud.  Bitcoins are a type of cryptocurrency.  Balances are kept using public and private keys which use long strings of numbers and letters linked through the mathematical encryption algorithm used to create them.

The public key (like a bank account number) serves as the address published to the world to which keeps track of the bitcoin balance. The private key (like an ATM pin) is secure and used to authorize bitcoin transmissions.

What is Bitcoin Mining?

If you wanted to, you could go out and buy bitcoin with money. Online services such as Coinbase and Gemini allow you to securely purchase Bitcoin and other cryptocurrencies with funds from your bank account and store your coins in wallets.  But you can also play prospector and try and earn them by “mining” for them as well.

Bitcoin mining is the process through which bitcoins are released into circulation.  Bitcoin miners solve computationally difficult puzzles to discover new blocks which are added to the blockchain.  In reward for doing this, the miners receive bitcoins.  But as more and more bitcoins are created, so is the difficulty of the mining process.

Why Bitcoin?

Bitcoins are anonymous and secure. They are a way to transfer money globally at no cost.  And because they are not issued by a government, they are not subject to devaluation.  Bitcoin can be translated into traditional currency and is now accepted as payment by a growing number of merchants.  All these things have made bitcoin attractive, causing its price to rise significantly and leading some to consider it as an investment.  But as an investment, it is one of the highest risk, high return investments out there. 

How much has bitcoin risen?  In July of 2010, Bitcoin was worth about 8 cents. Today it is worth $5400. That’s a cumulative return of 67,499%!  At the beginning of this year, bitcoin was priced around $1,000, but by September 1st it had moved up to $5,000.  On September 12th, the price dropped to $2,900 when China announced it was “banning” bitcoin.  But by October 13th, the price had hit a new high of $5,600.  How’s that for volatility?

So, while bitcoin might seem attractive as an investment given its return, it is still one of the riskiest investments you can own, assuming it is an investment.  JP Morgan CEO, Jamie Dimon thinks bitcoin is a “fraud”.  Others think bitcoin is in a “bubble” and that the bubble will soon burst.  Only time will tell.