A single bitcoin can now comfortably buy you a Louis Vuitton hand bag.
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As of June 14 the price of bitcoin stands at $2600. Exactly one year ago, the price of bitcoin was just $686. That is a rise of well over 200% and until as recently as May of 2017 bitcoin was around $1200. Right now, the world’s most well-known cryptocurrency is enveloped in a mania that is bound to come crashing down sooner or later. Bitcoin is in a bubble.
Refresh my memory please
A cryptocurrency is a digital currency, one where encryption is used to maintain the generation and transfer of said currency. Decentralized cryptocurrencies, like bitcoin, exist outside of the control of national central banks. Bitcoin was conceived of by someone named Satoshi Nakamoto but it’s not certain that this refers to a single person or a group of creators.
Bitcoin is a bit like gold in many respects. Gold has traditionally been the safe haven asset, the one that people bought into when they sensed trouble. Likewise, bitcoin is viewed as an asset for times of uncertainty. It exists outside of the system, so that’s where you go when the system is in trouble.
The way you get your hands on bitcoin is to “mine” them. Mining bitcoin involves using incredibly powerful computers to solve increasingly complex algorithms. Each time you solve one, you get some bitcoin. At first any average Joe could mine bitcoin using a standard laptop but today bitcoin mining is the purview of a few mining farms, many of whom are located in China.
Now if you want bitcoin you have to buy them. The easiest way to get your hands on bitcoin is to sign up online at a bitcoin exchange like Coinbase. You can even set up automated payments so you are able to buy small amounts of bitcoin regularly.
The key piece of technology that bitcoin introduced is the blockchain. Even if bitcoin goes away, the concept of the blockchain is likely to stick around.
When we first started getting on the internet, the issues of security, privacy and trust reared their heads. These issues are still here today but we’ve found a lot of solutions. Think about how readily you pay for something online with a credit card. When the internet was brand new, many people were extremely wary about doing such a thing. Today you don’t even give it a second thought.
There are still problems – especially around online payments. You give up a lot of personal information, everytime you conduct a transaction it goes through a third party, such as a bank. Transaction fees can be high, and frankly it’s still not that secure.
The blockchain gets around all of that. You don’t need a third party to conduct transactions. Instead the blockchain acts a trust network. It allows you to send me money directly and safely, without having to go through a bank, Paypal or service like Western Union.
Think of the blockchain as a record of transactions, like in an accounting ledger. The peer-to-peer network verifies and approves every transaction. The network is decentralized, consisting of everyone’s computers. Every 10 minutes, all transactions are verified, cleared and stored in a “block”. Each block is linked to the one preceding it, creating a chain of blocks.
It’s incredibly secure. If a hacker gets into Target’s databases (actually happened) then it’s a disaster. Everyone’s credit card information is exposed. With bitcoin, even the most advanced supercomputers would not be able to break bitcoin’s cryptography. The reason is that you can’t just hack into one block and change the information there – all the blocks are linked so you’d have to rewrite the entire ledger.
Fork in the road
There are ongoing disputes inside the bitcoin community, and we might see bitcoin split into two different coins.
This has major implications for the price of bitcoin. Forget about mania and speculation – this is the real game changer.
Right now bitcoin is considered slow. In an hour the network can confirm around 12,000 transactions. In comparison, credit card companies can confirm 12,000 transactions every 6 seconds. In order to speed up bitcoin, new strategies have been put forward and two camps have formed.
The first camp wants to keep block sizes the same but optimize the underlying code. The second camp wants bigger blocks. There’s more to it than that but we’ll keep it simple for now. If the two camps don’t come to agreement they may force a split in bitcoin. If that happens we could end up with two currencies: Bitcoin Core (BTC) and Bitcoin Unlimited (BTU).
That could lead to a whole mess of complications, when it comes to storing and transacting in bitcoin – but that’s a story for another time.
Where is bitcoin headed?
Bitcoin’s price has soared – driven by speculation and increasing demand in Asian markets. Japan formally recognized the currency in April, giving it some much needed street cred and bitcoin is growing steadily in terms of mind-share.
The current price increase is unsustainable. Anytime you see exponential growth like this, it’s followed by a crash. There have been three other times when bitcoin’s value took off and each time, the stratospheric rise was followed by a crash.
It’s likely that history will repeat itself, but that doesn’t mean bitcoin is dead. Bitcoin and the blockchain has a place in the world, we’re all just figuring out what that means. Whatever a bitcoin will be worth a year from today, it’s still an incredibly risky investment so be careful if you decide you want to own some. You could easily lose the majority of your principal over the next few months.