Security CU Blog
What is Bitcoin?
If you’ve been paying any attention to the news over the last few weeks, you’ve no doubt heard about bitcoin. But what is it? How does it work? Is it safe? These are undoubtedly questions you’ve asked yourself while watching the news lately. But don’t worry, we’re here to help. Let’s consider this a beginner’s guide to bitcoin.
Bitcoin is a cryptocurrency, or in other words, it’s a digital currency. Unlike the good old American Dollar, you can’t physically hold a bitcoin. You can’t withdraw bitcoins from an ATM and you can’t exchange dollars for them at those currency exchange places in the airport.
Bitcoin was created in 2009 by someone named Satoshi Nakamoto, unfortunately Satoshi Nakamoto isn’t a real person and no one is quite sure who this person really is. It was essentially created as an easy way to manage payments on a global level. Why? Well, what if you needed to send $5 to a sheep farmer in Ireland? You could do it through a service like PayPal or pay them with your credit card, but somewhere along the line somebody will need to convert your American dollars into Euros and when that happens, that person is going to charge you a fee. Bitcoin was created so you could just send $5 worth of bitcoin to that sheep farmer with no currency exchange costs. The idea makes sense.
But how does it work? Unlike currencies backed by governments (like the dollar), bitcoins are “mined” by computers. Bitcoin transactions are recorded in a public ledger one after another into a blockchain. So a bitcoin transaction gets registered and the blockchain sends out a record of the transaction to everyone, they include it in their blockchain (or ledger) and this new transaction is included by the next person to record a transaction. Does that sound confusing? Well, it is to us too. Let’s just say that bitcoin transactions are registered by other users and that there aren’t any governments or regulators keeping an eye on the audit trail.
Now that we know what bitcoin is and we have an idea of how it works, why are we all talking about it right now? We’re talking about it because the value of bitcoin has skyrocketed in 2017. It started 2017 valued less than $1,000 and news broke last week that bitcoin values have risen above $14,000. Then they quickly ran past $15,000 and now $16,000 and we can’t post this fast enough to keep up with its current value.
Many experts say that the price of bitcoin has taken off this year because more investors are flooding the market because of our old friend, FOMO (fear of missing out). After all, if your friends are making a bunch of money investing in this digital currency, why shouldn’t you? But why is the price increasing so quickly? It’s just like if your 8-year-old daughter asked for a Fingerling for Christmas. Since you can’t find the darn things in the store, you’re going to have to pay more than the $14.99 retail price for one on eBay. Demand for the product, and scarcity of the product, have driven up the price. While bitcoin is vastly different from a Fingerling (though I’ve never actually seen either of these things), the economic concepts are the same.
The experts are at odds over bitcoin. Investor Warren Buffett is skeptical of the currency, saying:
“It doesn’t make sense. This thing is not regulated. It’s not under control. It’s not under the supervision [of] any…United States Federal Reserve or any other central bank. I don’t believe in this whole thing at all. I think it’s going to implode.”
Jamie Dimon, CEO of JPMorgan Chase, has even called bitcoin a “fraud” and it’s been likened to a Ponzi Scheme. While other experts take a different view and think that we’re still at the bottom of the bitcoin bubble. They predict that bitcoin prices will continue to rise through 2018.
What will end up happening? No one really knows at this point and we can’t give you advice on whether bitcoin is right for you, however, we hope that after reading this, you’ll feel a little more comfortable the next time that Michael Strahan or the folks at 60 Minutes talk about the next big bitcoin story. Because whether the value continues to skyrocket or whether the bubble bursts, one thing is definitely going to happen, we’re going to be talking about it.
Have a question? Need help understanding a financial question? Drop us a note at contactus@securitycu.org and put “AskSCU” in the subject line, or ask us on social media with the hashtag #AskSCU and we may answer your question in a future blog post.