What makes Bitcoin different from a currency such as the USD? The difference is crucial to understand as you decide to dive into the world of crypto-assets, aka cryptocurrencies.
Bitcoin is a completely decentralized system. This means that there is no overseeing, or central, organization that can influence the currency directly. The records of the currency are spread across thousands and thousands—maybe millions now—of computers that ‘mine’ and maintain the blockchain.
In the current system, a government backs a traditional currency such as the U.S. Dollar. The U.S. Treasury decides when to print more money and the Federal Reserve controls the money supply with its power to create credit. While this system may provide some security for the dollar, it also gives these organizations control over the value of the dollar. If the government prints large amounts of money for any reason, then the value of the dollar decreases and inflation rises. The same amount of dollars would buy the consumer fewer goods than before.
With a decentralized system such as Bitcoin’s, there is no organization that can influence the amount of currency in circulation. There is no central bank to have any sort of control over the money supply. Instead, it’s scarcity, utility, supply, and demand that dictate the value of an individual Bitcoin.
The Bitcoin System
Now we’ll break down the technology behind the Bitcoin so you can make your own judgment of its value.
More Bitcoins are released into the market on average every 10 minutes. The system started out rewarding the computer that successfully mined the right block with 50 Bitcoins. This amount is halved every 4 years, and at the time of writing the reward is 12.5. Eventually there will be no reward, therefore Bitcoins have a finite supply and are scarce.
The utility of the Bitcoin can be summed up as the value that one can receive from exchanging it. As more and more retailers, organizations, and individuals accept Bitcoin as a form of payment, its utility will increase, causing the value of Bitcoin to increase in turn.
Supply & Demand
There is already a significant demand for Bitcoins and a limited supply. As more individuals want to exchange other currencies for Bitcoin, the value increases. In the current market, many believe Bitcoin to be a good investment and thus they’re purchasing Bitcoins and holding onto them. When a significant number of people purchase Bitcoin to simply hold it for value, the amount in circulation decreases. As the available supply decreases, the value increases. As the demand increases—and if supply stays the same or decreases—the value increases.
This is information on how Bitcoins are created and what makes them different from a standard currency. Invest and purchase any crypto-asset at your own risk.Opinions expressed here by Contributors are their own.