What is Bitcoin and can it make you filthy rich?

Bitcoin is the name given to a new currency designed to facilitate transactions just like Dollars or Euros etc, but it only exists in a digital form. This means there is no physical currency like cash or gold nor are there institutions like banks that are minting or circulating it. Hence the term ‘de-centralized’ is often used when discussing Bitcoin. This essentially means, it isn’t controlled, created or distributed by one single entity but rather the digital network over which Bitcoin is circulated and exchanged is spread across the world. 

In its simplest form, Bitcoin is a ledger with names of all the Bitcoin owners and the amount of Bitcoin that they own. This ledger keeps track of transactions that are conducted and updates what each owner possesses once they have either acquired or spent some of their Bitcoin. This ledger resides on a special kind of database called a ‘blockchain’ where the information, as the name implies, is stored in chunks called blocks which are chained together. The data stored in blocks is irreversible and each block is finite in terms of its storage capacity, which once filled, is added to the end of the chain. This chain is then stored across a vast network of computers (called nodes which aren’t owned by a single entity but rather by millions of users) across the globe. Since each node has the full record of transactions, errors or deliberate tempering is impossible as the blockchain has millions of other nodes as reference points to compare itself against and correct itself. 

Bitcoins are generated as a result of a process called mining. The Bitcoin algorithm/protocol is designed such that only a limited number of Bitcoins (21 million) will ever be generated at a specified interval. These newly minted coins will be rewarded to the ‘miners’ who perform the job of processing bitcoin transactions as well as securing the network using powerful computer hardware. As more miners join the network to mine for coins, the more competitive the mining process becomes. Especially in recent years, the cost of mining Bitcoins has increased many folds as increasingly powerful computers are utilized to process transactions requiring more specialized hardware which in turn require more power consumption.  

Like everything else in the economy, the rules of supply and demand also apply to Bitcoin. As it’s gaining more momentum and becoming more popular, Bitcoin is seeing an increase in demand which in turn is pushing the price up. The most recent spike in Bitcoin price (near the end of 2020) is said to have been caused by adoption of the crypto currency by conventional payment processors such as PayPal and Square. The companies are going to allow more users to potentially snap up the scarce supply of the coin in circulation, driving the price even higher. Also, given the coin is in limited quantities, small increases or decreases in demand can have a huge impact on the price. 

Given the volatility of the asset and the slew of unknowns associated with it, we suggest only to invest money that you don’t need back in a hurry nor would you miss it if you lost it. There are safer investment alternatives out there. Like every other monetary investment, make sure that you understand how it works before investing in it. It is not a get rich scheme (though some have gotten rich off of it) but rather a highly speculative investment that is still in its infancy, so proceed with caution.