by Marc Georgijewitsch
17th December 2017, Bitcoin reaches its all time high of $19,783.06. If you never heard the word bitcoin before, after mid-December of last year you will certainly have read it, heard it on the news or seen crazy people on social media, explaining that they will be a crypto- millionaire soon!
But what is it all about?
Two weeks ago I explained the basics of cryptocurrencies in general, so we can determine following: “Bitcoin is a decentralized digital currency”, so no bank is involved in the transaction of your assets.
Where does it come from though?
Bitcoin is a cryptocurrency that is created by a process called “mining”. When you send me 1 Bitcoin, this transaction is recorded and verified by a lot of other people — via the processing power of their computers — and this information is saved on the Bitcoin blockchain. Last week we learned how a peer-to-peer distributed system maintains trust and data integrity. But how does the transaction actually work?
When you decide to send me 1 Bitcoin, you will tell your Bitcoin client (wallet) that you want to send me this amount of Bitcoin. Your wallet signs this transactions with the private, making sure that no one can tamper with the amount you are sending, or where you are sending it too. Your bitcoin is under way to me! Now it gets a bit complicated. A number of random peers on the Bitcoin network use their computers to calculate thecryptographic hash function, to ensure the safety and validity of this transaction. Basically every 10 minutes, a lot of transaction, just like ours get bundled into a block. To execute these transactions, this block has to be “calculated”. As this takes a lot of processing power and is energy costly, these random peers calculating the block, get rewarded for their work in form of a transaction fee. Paid in bitcoin, created through these calculations.
So, summarized in really easy terms: Bitcoin is created through solving a mathematical problem using your computer, which is needed to transfer someone else’s bitcoin to a new address. Whilst this is happening your get rewarded for your effort with new bitcoin. (More explanation on mining is going to follow in the next weeks, so keep tuned).
So we know how Bitcoin is created, but how the f*** does this process justify the whopping price of currently of currently 4835.19€?! Well, this topic is very controversial. A lot people think, that Bitcoin has no real value, it’s only a bubble based on speculation. Other people are firmly convinced that Bitcoin is the payment system of the future and have sold their house and invested all their money in to it.
But lets try to quickly analyze a possible explanation for the price of Bitcoin. Bitcoin is a scarce resource, like Gold it does not have infinite supply. The mathematical limit of possible created Bitcoin lies at 21.000.000, currently in circulation and already “mined” are 17.300.000. Just like Gold, the natural limit of the supply creates value in itself. But Gold can be used for jewelry and for medical appliances, so that’s why its valuable, right? Bitcoin cant be made into jewelry, no, but it holds the very attractive feature that it cant be interfered with by banks or institutions, a transaction cannot be tracked to a person, just to a wallet and it cannot be manipulated with. Which means a lot of security, and the weird mixture of transparency and secrecy.
I think this should be enough about XBT this week, I hope you are smarter now. Try explaining Bitcoin to your grandmother, or even parents, and see if they get it after you explained it!