The rise of Bitcoin has been and continues to be, meteoric. Everyone is talking about it but, if you aren’t that tech savvy, discussions about whether or not to invest can quickly become beyond many people so let’s go back to basics to discover what the terms mean so you can more easily understand the conversations surrounding this new currency.
What is Bitcoin?
It’s one type of cryptocurrency just as the Dollar, the Euro and the Yen are types of government-backed ‘fiat’ currency. Because Bitcoin was the first decentralised cryptocurrency, it’s the type of cryptocurrency that everyone is talking about but there are others such as Ethereum and Monero. As well as ‘hard-forks’ from BitCoin itself such as BitCoin Gold and BitCoin Cash.
And, I know what your next question might be…
What is a Cryptocurrency?
It’s actually not that hard to understand.
Cryptography is the process of secure communication.
A cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to:
- secure its transactions
- to control the creation of additional units
- to verify the transfer of assets.
The type of cryptography used in the cryptocurrency world is called the blockchain. (I will post another blog about the blockchain but for now, it’s fine to understand that it is a secure communication system)
Why are cryptocurrencies so important?
Basically, it’s about freedom!
Firstly, let’s be clear – a currency is simply something that 2 (or more) people agree that they can exchange between themselves for goods or services. This can be a cryptocurrency or it could be seashells!
When we use government-backed currencies, we generally have to use a middleman ie a bank, to facilitate our transactions and this costs money.
With a cryptocurrency, there is no central authority. It is person to person without any borders essentially giving everyone the same level playing field without being held back by governments or big banks.
But it’s not real! It doesn’t really exist
Well, let’s talk about that. You might be amazed to know that traditional, government-backed currencies, such as the Dollar, are also not linked to any physical asset. Until 1971, the Dollar was linked to gold; this was called the Gold Standard. However, a country on the gold standard cannot increase the amount of money in circulation without also increasing its gold reserves. Because the global gold supply grows only slowly, being on the gold standard would theoretically hold government overspending and inflation in check.
In fact, the Dollar is a Fiat Currency which means currency without intrinsic value; it is only established as money by government regulation. It has an assigned value only because the government uses its power to enforce the value of a fiat currency.
Think also about the fact that many of us also handle a lot of our money digitally. We use debit or credit cards, we get paid by bank transfer directly to our bank accounts and pay our bills via direct debit or standing order. Some of us rarely see cash which should make the idea of a digital currency a bit less scary.
Please let me know in the comments below if this has helped you to understand what Bitcoin is and don’t forget to subscribe to my newsletter for updates.