By the time you read this, the bitcoin price may already be higher than advertised.
Bitcoin, as of 9:52 a.m. Pacific Time, is at $15,534.70, according to the reliable bitcoin digital exchange Coinbase, which is actually quite a surprise. Bitcoin, after yet another meteoric rise Thursday morning, smashed the $16,000 barrier before taking a massive tumble.
Such is the life for the arguably hottest and most volatile commodity in the world. In some bitcoin markets, the cryptocurrency has already hit more than $19,000, with the $20,000 mark close at sight.
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To put that into context, bitcoin passed the $10,000 mark on Nov. 28. Bitcoin passed the $1,000 mark in February and was worth mostly a fraction of that since it was created in 2009.
So, how is this happening? What is happening? Is this really happening? Here is a primer to help you understand bitcoin — before this post goes outdated, too.
What is this bitcoin thing?
Let’s start with the basics: It’s first and foremost a cryptocurrency, which means a currency that only exists on the internet. Think of it like a dollar, but a dollar not backed by the U.S. government — or any government. Unlike the price of a dollar, which is declared by our Treasury, bitcoin’s price is fluid and is entirely contingent on market forces.
It can be purchased on a digital exchange, like Coinbase, or via ATM. All it requires is a bitcoin wallet app to purchase, store and sell bitcoin. The decentralized and easy process — now that everyone has a smartphone — allowed bitcoin to cultivate a strong community.
Another thing to note is that bitcoin has a finite supply: 21 million bitcoins. That number was set by Satoshi Nakamoto, who’s commonly known as the father of bitcoin. (Despite numerous efforts by the press, nobody has nailed down who Nakamoto really is.)
Now, bitcoins need to be mined (more on that later), so not all 21 million bitcoins are in circulation yet; only 16 million are in circulation right now. Bitcoins can be purchased fractionally. The finite supply is helping drive up bitcoin’s price, but it’s not the whole story.
I have no ideas what frequently-used bitcoin-related words like mining and blockchain are.
Remember how bitcoin has no government backing it up? That also means there is no central government mint to print bitcoins as well. So instead, bitcoin is mined, which is a simple word for saying high-powered computers owned by individuals around the world do complicated calculations to ensure new bitcoins enter the market.
The calculations have a two-pronged purpose: to mine more bitcoins (until it hits the 21 million mark) and to verify all bitcoin transactions. Again, there is no central body to confirm the transaction is legitimate, so the network of computers take it upon themselves to do so. The public ledger to document all the transactions and ensure its validity is called a blockchain; it is a publicly accessible visual chain of all transactions — which the computers package into “blocks” — in bitcoin’s history.
There is also a competitive edge to the blockchain network. Because a blockchain can get long really fast and take up a lot of memory, computers also try to compress the records into a sequence of numbers and letters called hash. For every successful hash, the owner of the computer gets 25 new bitcoins added into circulation, according to Coinbase.
So what’s happening now?
Some outlets, such as the Washington Post, attribute bitcoin’s rise to simple supply and demand. Bloomberg attributed it to the cryptocurrency’s improved reputation over time from its early days when it was considered a black market den. Mashable sought a more external force, like a new Japanese law earlier this year that recognized bitcoin as a legitimate payment method.
It’s all of three of these — and more.
Other financial institutions such as Nasdaq have shown interest in joining the bitcoin movement, which added validity to the commodity. And let’s not forget that earlier this year, there was the initial coin exchange mania, where startups would basically have a cryptocurrency IPO by raising money from individuals online rather than from Wall Street.
Some raised $100 million and more, kickstarting a new appreciation for cryptocurrency that led to bitcoin, the time-tested and perceived to be reliable cryptocurrency, to have its moment in the sun.
So what now?
Here is where the bubble talk comes in. For anything that grows over 1,000 percent in less than a year, nearly all would pass the bubble smell test.
Many central banks are freaked out by the bitcoin speculation. China’s central bank envisioned they will “sit by the river bank and see bitcoin’s body pass by one day.” The Royal Bank of Scotland compared bitcoin to “Dante’s Inferno.”
As for the United States, Secretary of Treasury Steve Mnuchin said his office is looking at bitcoin “very carefully.” Banks are very concerned that two firms trying to open a bitcoin futures market — allowing transactions of bitcoin to happen at a specified date later in time, rather than immediately — will create chaos in the already volatile market.
Other pessimistic theories have been floating around. One from the Financial Times mused whether a group of unnamed investors are trying to short bitcoin by buying massive amounts of it, leading to the rising prices, and then selling it before the futures market tentatively opens early next week.
Others are concerned that the volume bitcoin transactions aren’t keeping up with the growth in price, indicating people are sitting on their bitcoin rather than letting it be fluid.
Either way, there are only two ways bitcoin can go: up or down. If it goes up, as many bulls expect in at least the short term, perhaps bitcoin will be the currency to rule them all. But if it crashes, say by 95 percent, the bitcoin value will still be over $700. That probably will not the end of the world for bitcoin.
Above: A screenshot of bitcoin’s price in the past year. (Coinbase)
Tags: bitcoin, Satoshi Nakamoto, Steve Mnuchin