Good Question: What is bitcoin?
We posted a story from CNN Tuesday saying bitcoin has powered past $10,000 for the first time.
News reports indicate it surpassed $9,000 just last weekend and soared above $8,000 a little more than two weeks ago.
“In the past two and a half weeks alone, bitcoin has skyrocketed more than 70 percent,” the CNN report states.
Wences Casares is the CEO of Xapo.com, a bitcoin wallet startup (if that does not make sense, it will later). In August, Glenn Beck spoke with Casares on his radio program about bitcoin.
“It’s likely to be more important than the internet itself.”
“Bitcoin is still an experiment. As such, it has chances of failing,” said Casares.
That’s why, according to him, no one should invest anymore than they are willing to lose.
“But if it succeeds, it’s likely to be more important than the internet itself,” Casares said in the interview.
There has been a lot of conversation lately surrounding the value of bitcoin versus the risk of investing. Many people engaged in this conversation also admit they do not understand fully what bitcoin is and how it works.
“When people don’t understand (bitcoin), it’s not their fault. It is our fault, the people explaining it,” Casares said in the same interview. “We make it more complicated than it needs to be because it makes us sound more intelligent or something.”
Casares said most people feel comfortable in their understanding of the internet without really understanding how it works. Similarly, Casares says it is not necessary to understand every detail of bitcoin to be able to use it.
He did say, however, there are three things everyone should know about bitcoin.
- Nobody can control it.
- There will never be more than 21 million bitcoin, because a finite amount of digital currency eliminates inflation.
- You can send bitcoin to anyone you want, anywhere in the world, in real time for a low cost.
With that background information, I decided to see what I could learn about it for this week’s Good Question.
What is bitcoin?
Bitcoin was created in 2009 by a person using the alias Satoshi Nakamoto.
According to the official website, bitcoin.org, bitcoin is a digital form of currency, meaning it is not a tangible asset.
Jackson Wood is a financial adviser with Carol Holm Financial in Blackfoot. He first invested in bitcoin in 2012. He explained to me what bitcoin is in simple terms.
“Bitcoin is a peer-to-peer version of cash, electronic cash, that allows payments to be sent directly from one party to another party without going through a financial institution,” Wood said.
The idea behind bitcoin, Wood said, is to separate money and state — to bypass the banking system and give control back to individuals. This is what Casares meant when he said bitcoin cannot be controlled. Wood described bitcoin as a “disruptive technology.”
“The only reason it has value is because humans are placing subjective value on the invention of bitcoin,” he said.
How does bitcoin work?
“If we can control our money, we can gain back power over our own lives.”
Bitcoin works very much like the exchange of physical money from one bank account to another. To get started, a user opens a wallet — a digital location to store bitcoins. The wallet is used to save or make transactions. Unlike bank accounts however, Wood says these wallets are trustless. He explained what this means with an example:
“Let’s say you wanted to send money from your bank account to an account in China. You would have to pay a fee to send a wire to the Chinese bank. There would be a currency conversion, which would take a few days. The Chinese bank would then charge the recipient a fee to withdraw the money.”
In this situation, Wood says, you have to trust the governments and the banks to facilitate the transaction.
“With bitcoin, I type in the amount I want to send, hit enter and within just a few minutes it’s in the other person’s wallet and it only costs a couple cents to send the money.”
Should you invest in bitcoin?
There are risks associated with purchasing bitcoin. One of those is market risk.
“(Bitcoin) could go to zero if everyone (who has invested) starts to sell their bitcoins,” Wood said.
Other risks include political and technology risk.
Based on the information I gathered, the decision to invest in bitcoin is based more on one’s belief that there is a better way to use and measure currency than it is about accumulating wealth.
“For me, it was like envisioning a utopian dream. If we can control our money, we can gain back power over our own lives,” said Wood.
Casares statement about understanding every detail of bitcoin not being a necessity to use it contradicts what Wood said during our conversation.
“If you do not have a high level understanding of what bitcoin is, I don’t think you should invest in bitcoin.”
He recommends doing 6 months to a year’s worth of research before deciding to invest.
If you would like to learn more about bitcoin, Wood says this link is a good place to start.