Bitcoin: The New Trend

Bitcoin is a cryptocurrency that has been in the news and in conversations recently for various reasons. While not all retailers will take Bitcoin, and there are fairly good reasons not to, but the cryptocurrency has really taken off.  However, despite how much the word “Bitcoin” is used, the nature of the virtual currency provokes a sort of air of mystery. Unless one researches how to find or buy it, it remains a type of investment that is more exotic than what is commonly available to consumers. Why is Bitcoin so expensive? How does one find and buy a Bitcoin?

Why is Bitcoin expensive?

To properly explain Bitcoin, it’s important to restate one of the fundamentals of economics. The value of a commodity is determined by supply and demand. When it comes to currency specifically, this translates to “the more common and easily- obtainable the currency is in the market, the price will become less in the market.” This is what’s referred to as “inflation.” The purchasing power of a currency goes down because there is more of that currency.

Bitcoin has limits on its production as a total of 21 million can be mined altogether.  One might think they can simply just “make” more Bitcoin especially as there is no centralized producer of the currency. However, the developers have come up with an interesting solution. The way Bitcoin is mined involves the general ledger (a list of all the Bitcoin transactions) and a mathematical process. This mathematical process is called mining. Miners will take a block of the transactions and apply this mathematical formula using a computer to create what is called a “hash.” This hash is an essentially random series of numbers and letters. This essentially verifies the transaction, and by doing so, the miners get a reward. Furthermore, any attempts to falsify the public ledger will be known, and there will be no reward for doing so as others may check your work.
However, that reward varies based on when they do so. Approximately every four years, the amount of Bitcoin rewarded to a miner is halved.  So, why do it when the miners perform a service for the public ledger?

The answer is simple: It is to prevent inflation. Bitcoin is designed to act more like a commodity, like gold, than a fiat currency like the dollar. This would prevent an “influx” of Bitcoin as it may cause a considerable drop in its value.  As a result, Bitcoin is a rare commodity, and until an event happens that would sufficiently devalue it, it will retain or grow in value.

How do I get Bitcoins?

As we mentioned above, mining is an option. Mining, however, can be expensive. While really any computer can be used for mining, the main issue is profitability. Mining takes up a lot of resources due to the processing speed needed to adequately create hashes and the need to keep the computer adequately cooled as it can generate a large amount of heat.

Alternatively, another option is to buy Bitcoins. This would mean going to a website that exchanges your regular currency in for Bitcoins, to be stored in a digital wallet, which is an application that keeps track of your Bitcoins, and connects to the general ledger.

With all of that, Bitcoin may not be for everyone, and it would be important to adequately determine the costs and benefits associated with gaining it before becoming too invested in the system.

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