Bitcoin and other cryptocurrencies have been getting a lot of attention lately. Investors hear news about overnight Bitcoin millionaires who lose their fortunes just as quickly. One Bitcoin ranged in price from $1,000 in early 2017 to a high of over $60,000 in March 2021, with intense volatility in between. Understandably, investors have questions—here are answers to some of the most common.
What is Bitcoin?
Bitcoin is a virtual, digital, or “crypto” currency—so called because of the cryptography, or unchangeable coding techniques, involved in the blockchain code on which they exist. The intent of Bitcoin is to allow online payments to be made directly from one party to another through a worldwide payment system, without the need for a central third-party intermediary like a bank. Bitcoin is not issued by any central bank or government and is not legal tender. Like physical gold, Bitcoin’s value stems from a combination of scarcity and the perception that it is a store of value, an anonymous means of payment, or a hedge against inflation.
What's the relationship between Bitcoin and blockchain?
Blockchain, the underlying technology that supports cryptocurrencies, is an open-source, public record-keeping system operating on a decentralized computer network that records transactions between parties in a verifiable and permanent way. Blockchain provides accountability, as the records are intended to be immutable, which presents potential applications for many businesses. While blockchain has often been associated with cryptocurrencies, it has many potential uses beyond payments, including smart contracts, supply chain management, and financial services. Note that ownership of Bitcoins or other cryptocurrencies is not an investment in blockchain, the technology, or its current or future uses.
What is cryptocurrency, and how is it valued?
Fiat currencies like U.S. dollars and euros are forms of money issued by governments to serve as legal tender. Cryptocurrencies such as Bitcoin, on the other hand, are “non-fiat,” non-governmental forms of “digital cash” to be used for electronic payments. The idea of “digital cash” isn’t new; it started with credit cards, PayPal, Venmo and other services’ need for easy, traceable electronic payments. But those payments are tied to fiat currencies managed by central banks, whereas cryptocurrencies are managed by technology, specifically cryptology. Proponents believe the value of a cryptocurrency is based on the quality of the cryptology, the number of cryptocurrency units created, and the technology that limits the creation of additional units. Like any traded item—think baseball cards—the value depends on supply and demand; the less units available, the higher the price buyers are willing to pay.