Bit Coin Explained like you are five

How did Bitcoin Start?

Bitcoin debuted in 2009, some say fueled by the economic crisis. Whether this was opportunistic or not, that has not deterred bitcoin from becoming a revolutionary digital currency. Considering the timing of the launch of bitcoin, several analysts speculated that bitcoin would usher in a whole new world in banking and finance in general. Others remained overly skeptical and some even associated bitcoin with illicit activity. the assumption that bitcoin was going to usher in a new world in finance rooted from the fact that it is a decentralized currency hence it would not be affected by the challenges of centralization but would instead remedy this challenges. Its early association with illegal activity was driven by the fact that it is a decentralized currency, meaning no one and no institution had control over bitcoin transactions. In other words, one would send bitcoin from one country to another in a matter of seconds without requiring to seek permission from any institution. This holds true to date.

How are bitcoins created?

Considering that bitcoin is not controlled by any central institution, it is only human that one be curious about where bitcoin comes from. More bitcoins are introduced into the market through a process called mining. Mining is a technical process that entails solving complex arithmetic puzzles on the blockchain. The first miner to solve the puzzle is rewarded in bitcoins and that is how more bitcoins come into circulation. It is important to note that the supply of bitcoins has been set at a hard cap of 21million bitcoins. This cap is expected to be hit by the year 2140. The current supply of bitcoins is well above 16million.

The relationship between bitcoin and blockchain

It is virtually impossible to talk about bitcoin and not talk about blockchain; it would be like talking about cheese while trying to distance it from milk. The blockchain is the technology that bitcoin runs on. Essentially, without blockchain, there would be no bitcoin. The blockchain is defined as a decentralized distributed ledger that is immutable and synonymous with unmatched transparency and accountability. The transparency and accountability for blockchain is exhibited by the fact that every node connected to the blockchain can view but not alter the information therein and in addition, the blockchain has a self-audit ecosystem that audits the system every 10 minutes. Moreover, the blockchain operates on a peer-to-peer network whose main role enabling the verification of transactions on the blockchain.

It is important to mention that both bitcoin and blockchain are considered to be the brainchild of a person, an AI or a group of people only known by the name Satoshi Nakamoto. What’s interesting, some people purport that bitcoin was an accidental invention born in the process of creating the blockchain. While factual backing of this assertion remains unavailable, the developer of this digital currency is the only one who can confirm or deny this claim.

As mentioned earlier, bitcoin was received with its own share of jubilation and doubt. Basically, the doubt was pegged n, among other reasons, prior inventions that were closely similar to bitcoin but which ended up being unsustainable bubbles. A good example is the Dutch Tulips. For this reason, the value of bitcoin was significantly low and that remains the same until early last year. Notably, the price of bitcoin did not reach the $200 mark until early last year. Additionally, the surge in the number of cryptocurrencies in the market started shortly after the value of bitcoin started to experience some gradual increase.

Stating that Last year was the beginning of a new ear for bitcoin might not be misplaced. This is considering that the price for this digital currency started a rising streak early last year. In comparison to last year, 2017 is the most favorite year for bitcoin. Over the last 11 months since January this year, the price of bitcoin has increased by more than 1000%. Most of this increase has been realized in the second half of this year. So what has really been the cause of this price surge?

Factors underlying bitcoin price surge

Global demand for bitcoin

Economics dictate that when demand for commodity increases, its value of bound to increase. Since mid of this year, Bitcoin has seen a larger number of investors pump their money into the currency on speculation that its price will continue to go higher. This year has probably seen more workshops creating awareness about bitcoin more than that any other year before. Additionally, many people have taken the initiative to familiarize themselves with this digital currency that has been a source of widespread hype and fascination. Now that bitcoin is in the mainstream, investors see it as a new class of assets hence they are creating multimillion dollar hedge funds to acquire it. Alphabit, a global fund that is focused on investments in digital currencies was launched in April this year with an initial target of $300 million.

While some perceive bitcoin as a good short-term investment, others are looking at it like digital gold which can be used to store value amidst economic and political instability. For instance, there have recently been political upheavals which have seen the value of the currencies for both countries drop. To a large extent, this has contributed to the uptake of bitcoin further driving its value higher.

Additionally, the second half of this year has been characterized by the rise of multiple blockchain based startups most of which have been seeking to finance through ICO crowdfunding. Essentially, ICO crowdfunding entails selling the startups tokens (digital currencies) to the public in exchange for FIAT currency or bitcoin. While it is possible to buy these tokens using the conventional fiat currency, many people opt to buy these tokens issuing bitcoins especially due to the ease of transfer. Therefore, in some way, the demand to invest in the ICOs has contributed to the demand in bitcoin again contributing to the surge in its value.

Despite the warnings being spread around that bitcoin is a bubble, more people are getting inclined to invest in bitcoin. In the UK, a London property developer, The Collective, impressed that it would allow the tenants to make deposit payments in bitcoin and pay their rent in cryptocurrency by end of 2017. Besides, celebrities are in the race to get a share of this lucrative currency. Notably, boxer Floyd Mayweather, actor Jamie Foxx, and socialite Paris Hilton have been promoting the coin offerings.

Backing by the governments

It is interesting to note that the vast majority tend to take government commentaries as gospel truths especially on matters that they are to very familiar with. For the longest time, governments have been opposed to bitcoin based on the assertion that it poses major risks of money laundering, tax evasion, and even funding terrorism. Countries like Russia, sometime back, were very categorical on their disregard for bitcoin based on this assertion. Recently, however, some of the countries that were once opposed to bitcoin have now developed a soft spot for the currency and are now looking into ways to adopt it. In October for instance, Russia took a different stand rallying its support behind bitcoin. This it did by urging its citizens to engage in bitcoin mining besides setting off on a process to establish regulations for bitcoin transactions. this has significantly boosted the rise of bitcoin price.

Besides Russia, bitcoin has recently received favorable backing from Japan. Sometime in September of this years, Japan’s Financial Services Agency officially recognized eleven companies registered as cryptocurrency exchanges. Notably, one the exchanges in Japan called bitflyer has over 800,000 users and this number is bound to increase following the recognition. The CEO of bitflyer, Yuzo Kano believes that the new cryptocurrency regulations Japan could see Japan become an epicenter for bitcoin.

In a press release which happened sometime in September, Kano stated that “Japan has been exploding with demand for both bitcoin trading as well as virtual currency services.”

The Hype

Anyone who has been following bitcoin for a while knows that bitcoin is prone to spectacular crashes and surges. In mid of this year, a fork coined segwit happened resulting in the creation of a new form of bitcoin known as bitcoin cash. This attracted the attention of the investors who then pumped their funds into the currency driving its price to new record highs of $3,000. Another fork coined dsegwit2x was scheduled in November of this year. This would have seen bitcoin split again to create another form of bitcoin. The aim of this fork was to increase the transaction capacity of bitcoin blockchain. In anticipation of this fork, may investors had redirected their funds to bitcoin driving its price to $4000. The cancellation of the fork saw the price drop to about $2700 and move back up to about $3500 in just one day.

The hype surrounding bitcoin roots from the fact that it is a lucrative investment and its usability in the mainstream only continues to grow. Further exploration of the applications of blockchain have also contributed to the hype behind bitcoin consequently contributing to the increase in its value. Bitcoin is currently valued at $11,728 according to coinmarketcap.