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What is Bitcoin?

A New Digital Currency

Late 2008 marked the beginning of the Great Recession – the worst financial crisis America has seen in decades. It was caused by subprime mortgages – extremely high-risk loans – being collected and then sold by one financial institution to another.

When many of these mortgages defaulted, the United States economy was devastated. This prompted mass foreclosures, layoffs, huge losses in the stock market, the collapse of major financial institutions including Lehman Brothers, who filed for Chapter 11 Bankruptcy, and a subsequent, ongoing debt crisis throughout Europe.

At the core of this crisis was one issue: trust. Individuals who were sold risky loans believed that the institutions selling them, as well as the people working for them, worked to help grow their money and protect them. However, the financial crisis reinforced that many investors were predators acting solely in their interest, and massive bailouts provided by the federal government did nothing to help rebuild this broken trust.

The Problem with Money

In response to this total institutional breakdown, Satoshi Nakamoto wrote a nine-page whitepaper entitled “A Peer-To-Peer Electronic Cash System.” In this whitepaper, he essentially proposed the computational and mathematical foundations of Bitcoin. As ecommerce became increasingly prevalent – and payments processors like Visa holding almost all of the authority in this realm – many people, more fearful than ever before, felt uncomfortable with how many third parties they needed to interact with to do business. There was no true electronic equivalent of cash, and there were also increasingly serious problems with so-called “fiat currencies,” like the Euro, Bolivar, and US Dollar.

These currencies, controlled by central authorities, were subject to significant – and arbitrary – inflation, which could cut their value – and one’s overall net worth – dramatically. In countries like Venezuela, notorious for its unstable economy, citizens make money operating shady currency exchanges and relying on potentially dangerous third parties for transactions such as buying a home.

Thus, there was a serious problem – and a need. Cash gives its owners significant control, and can be used anonymous and privately. Digital currency, on the other hand, was much easier to use to pay people instantly, do international business, or transfer from person-to-person. Unfortunately, digital currency came with high fees for domestic and international transfers, as well as conversion from one currency to another, reducing access for people of lower incomes or residents of emerging countries. Because citizens are effectively forced to use companies like Moneygram and Western Union to make transfers, they can charge exorbitant fees.

Bitcoin’s Beginnings

Satoshi Nakamoto set out to solve a major issue with previous forms of digital currency: “double spending.” In the past, attempted digital currencies, like any files, were duplicated when they were sent. Compare this to making a cash transaction, where you give someone a dollar bill – and then don’t have it anymore, or credit card transactions, where it’s possible to complain and get a chargeback from your credit provider.

Nakamoto’s solution to this problem was the blockchain. The blockchain solves this problem by creating a peer-verified timestamp, which serves as proof of transactions and when they happened. The blockchain is encrypted in such a way that it can be viewed and verified publicly but still protects its users. It is called the blockchain because each “block” is viewable and accepted by a consensus. Around every ten minutes, a block is confirmed by the majority of computers on the blockchain, and at that point, the transaction can’t be reversed, charged back, or altered in any way.

Blockchain transactions consist of sending Bitcoin (or other digital currency) from one “address” to another. However, each individual who sends Bitcoin needs to know their private keys in order to access their accounts and funds. Anyone who uses Bitcoin can see a wallet, as well as how much Bitcoin is inside of it, but they cannot see who owns it.

Each Bitcoin is “mined” in order to reward the computers that complete the complex computing equations that keep the blockchain secure. Unlike fiat currency, there is a hard total number of Bitcoin built into the protocol – just like gold. This ensures that Bitcoin is secure and scarce – and will continue to increase in value as the network continues to grow.

Money for Everyone

As Bitcoin has grown in popularity, it has become easier and easier to use. While the process to purchase or spend Bitcoin was once convoluted and required many different steps, using a service like Coinbase, anyone with a computer or phone with access to the internet can purchase cryptocurrency using a bank account or credit card.

Blockchain has inspired countless technological innovations, including many new apps, browsers, networks, and tools. We are in the midst of a technological revolution in how we network and compute – and blockchain is at the center.

Furthermore, Bitcoin has proven to be an increasingly powerful investment, with coins jumping in value from $1,000 USD to over $10,000 USD over the course of 2017. Bitcoin is the standard bearer for cryptocurrency and what all other coins are measured against. Regulation around digital currency, however, is still changing. Right now, Bitcoin and other digital currencies are seen by the Securities and Exchange Commission as commodities – and, like a commodity, Bitcoin undergoes daily price fluctuations and has a fixed supply.

The New Economy

The key to Bitcoin’s long-term success is its scarcity. As time passes, the amount of Bitcoin released as a reward for mining goes down, and the final Bitcoin is expected to be awarded in 2140. At that point, one Bitcoin may be worth hundreds of thousands of dollars. The last several years have shown Bitcoin making strong upward growth – and continuing to do so.

Because Bitcoin and blockchain technology have proven themselves to be secure over time, it has been adopted not just by hobbyists but by traders, investors, and many new applications pushing its value to new highs. There has been a significant amount of speculation surrounding the best opportunities to purchase or sell Bitcoin, but individuals who have held Bitcoin for long periods of time have made the most significant gains. Bitcoin is approaching critical mass and adoption by people and businesses worldwide, making it clear that the cryptocurrency revolution is just getting started.

If you’d like to make Bitcoin a part of your retirement portfolio, click here to get started.

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