The Rise of Bitcoin and Digital Currency

Nine years ago, an anonymous individual created an alternative to centralized banking through Bitcoin. Traded exclusively over the Internet, bitcoins were the first form of digital currency, and today they are the most well known in existence.

In the early stages of their expansion, bitcoins had no value at all. As the company developed and began to trade in the spring of 2010, the value increased to 14 cents. The market for cryptocurrency has since become mainstream, which explains for the dramatic increase in price and value of bitcoins. In the past few years, the popularity and intrigue of this business has soared, simultaneously driving up the value of the bitcoin. By 2011 its value surpassed $1, and as of last week the value of all bitcoins had reached 189 billion US dollars. What separates them from any other form of currency is that their value is entirely dependent on consumer demand and therefore subject to extreme fluctuations and uncertainty.

So how does it work? Bitcoins are transferred directly from person to person via the Internet without going through a bank. The advantages of this currency over traditional, centralized banking include the lack of limits to joining, a smaller fee associated with transactions than with bank withdrawals and no middleman. The bitcoins are stored on your phone in a digital wallet, and can be sold as euros or dollars or traded online on bitcoin exchange sites. In order to pay using bitcoins, you simply pull up the QR code to show at any accepting store. The system prevents users from fraud and cheating by bundling transactions together in bunches called “blocks” that are sent to bitcoin miners to be verified. Trial-and-error computations are used to solve the data puzzle that follows a transaction. The first miner to complete the puzzle earns the right to bundle these transactions. Once the transaction is verified, a new coin is issued to the miner to ensure that future transactions cannot reuse the same funds.

A novel idea that is an incentive to users of digital currency is the aspect of anonymity. Bitcoin allows users to create profiles under a username that is not linked to their real name, address or any other personal information. However, this aspect of the niche market has attracted money launderers, smugglers and drug dealers, as the transactions are difficult to trace. The appeal of the company to be used for illegal means is of concern to analysts who critique the fact that the business is largely unregulated and decentralized.

While some have compared the rise of Bitcoin to a large bubble bound to pop eventually, others believe that the currency is here to stay. NASDAQ, the second largest global stock exchange, recently reported that it would allow investors to bet on the rise and fall of Bitcoin starting in 2018, offering the potential to profit off of futures contracts. Bitcoin is predominantly traded on unregulated markets and NASDAQ, like its counterparts CME Group and CBOE that have opened up trading to Bitcoin, is heavily regulated. Essentially, the acquisition of the company brings “an air of legitimacy that should help investors feel more comfortable participating,” as predicted by a writer for Bloomberg. Is this digital currency the next step in the transition to a tech-heavy lifestyle or will the speculative nature of the cryptocurrency undermine its potential?