Basic Facts You Should Know About Bitcoin

what backs up the bitcoin

Bitcoin's price has been on a wild ride since its inception. As bitcoin's popularity surges and its price rises and falls, more and more people are asking the same question: How does bitcoin , something that's essentially invisible and intangible, have value? In economics, something has value if it checks the following two boxes: scarcity and utility. Scarcity just means that something has a finite supply. In the case of bitcoin, the cryptocurrency has a set cap of 21 million bitcoins.

Many analysts note that this set cap makes bitcoin more desirable than other assets, even gold. That's because unlike with gold, there's no need to worry about a digital Gold Rush. A treasure trove of bitcoin won't ever be "discovered," causing the crypto's price to crash with an influx in supply. Lee was chief equity strategist at J. Morgan before co-founding Fundstrat in Ben Yu, a blockchain expert living in San Francisco, says technological advances are also making gold easier to mine.

Many believe the cryptocurrency's utility lies in its potential to be a more efficient commodity than we already have. Proponents of bitcoin like it for a number of reasons. First, bitcoin is decentralized, meaning no government, bank or single person has control over it; it can't be toppled by corruption at the top. It's also trivially divisible, meaning you can buy a small item like a doughnut with it as easily as you can buy a house or even a mansion.

And finally, the code it's built on is open source, meaning that it's available for anyone to look at, scrutinize and even modify. This means bitcoin is constantly evolving and improving. None of those uses is intrinsic, however. And that's a point bitcoin skeptics often make. Gold, for example, is thought to have intrinsic value because of its applications in industries like dentistry and electronics.

Some people even argue that dollar bills have intrinsic value, since they can be used as kindling or to write on. But as you break down either of those claims, it becomes clear that gold and paper money don't have that much intrinsic value either. According to the World Gold Council, in , only 15 percent of gold was used in industries.

The majority went toward making jewelry and gold bars and coins — items that have value mainly because they're trusted to be valuable. It can be hard to see the digital currency as having value because you can't hold it in your hand like you can a dollar bill or gold. It's clear that some people believe bitcoin has value.

And if it has value, it's hard not to wonder how much a single bitcoin could end up being worth. The first theorizes that bitcoin, which some perceive to be a better asset than gold, could end up replacing either a portion of gold or gold entirely. Another theory of Lee's is based on Metcalfe's law, which says that the value of a network is proportional to the square of the number of users on the network. For example, one phone is useless because you can't call anyone else with it.

But the value increases exponentially as other people get phones. Studies have shown that Metcalfe's law holds true for Facebook using 10 years of data.

It also holds true for Tencent, China's largest social media company. Fundstrat looked at users on the bitcoin network and found that the square of this value explained 94 percent of the variation in bitcoin prices since Many people think that bitcoin is a bubble, and that's predicted on the concept that bitcoin has no value.

But there's reason to believe that that just isn't true. By definition, bitcoin is scarce. And the cryptocurrency may have utility as a superior way to store and exchange wealth. Sign up for free newsletters and get more CNBC delivered to your inbox. Get this delivered to your inbox, and more info about our products and services. Privacy Policy. All Rights Reserved. Data also provided by. Skip Navigation. Markets Pre-Markets U. VIDEO Bitcoin skeptics say digital currency has no real value — Here's why they're wrong.

Digital Original. As a solution, Lee said to think of bitcoin as a digital business. There are two main theories being used to calculate the potential value of one bitcoin.

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what backs up the bitcoin

What Would it Take for Bitcoin to be Worth >$1000?

If you cut the information inside computers into smaller pieces, you will find 1s and 0s. These are called bits. You bitcin know about coins. Bitcoins are just the plural of Bitcoin. They are coins stored in computers. They are not physical and only exist in the digital world! By the end of the guide, even total beginners will understand what Bitcoin is, how to get Bitcoin, and how to use Bitcoin.

Scarcity and utility

Bitcoin is a distributed peer-to-peer digital currency that can be transferred instantly and securely between any two people in the world. It's like electronic cash that you can use to pay friends or merchants. Bitcoins are the unit of currency of the Bitcoin system. There are such things as physical bitcoins , but ultimately, a bitcoin is just a number associated with a Bitcoin Address. A physical bitcoin is simply an object, such as a coin, with the number carefully embedded inside.

what backs up the bitcoin

You heard about this bitcoin thing? Every bitcoin story must include an image of a physical bitcoin. Note: What backs up the bitcoin bitcoin coins do not really exist. We're guessing: yes, you. But the Bitcoin story has so much more to it than just headline-grabbing pricing swings. It incorporates technology, currency, math, economics and social dynamics. It's multifaceted, highly technical and still very much evolving.

This explainer is meant to clarify some of the fundamental concepts and provide answers to some basic bitcoin questions. Bitcoin was invented in by a person or group who called himself Satoshi Nakamoto. Check out the New Yorker's great profile of Nakamoto from Simply put, bitcoin is a digital currency. No bills to print or coins to mint. It's decentralized -- there's no government, institution like a bank or other authority that controls it.

And it isn't issued from the top down like traditional currency; rather, bitcoin is "mined" by powerful computers connected to the teh. A person or what backs up the bitcoin, or company mines bitcoin by doing a combination of advanced math and record-keeping. Here's how it works. When someone sends a bitcoin to someone else, the network records that transaction, and all whah the others made over a certain period of time, in a "block.

These blocks are known, collectively, as the "blockchain" -- an what backs up the bitcoin, openly accessible thf of all the transactions that have ever been. Read: Blockchain explained -- it builds trust when you need it. Using specialized software and increasingly powerful and energy-intensive hardware, miners convert these blocks into sequences of code, known as a "hash. It's like thousands of chefs feverishly racing to prepare a new, extremely complicated dish -- and only the first one to serve up a perfect version of it ends up getting paid.

When a new hash is generated, it's placed at the end of the blockchain, which is then publicly updated and propagated. For his or her trouble, the miner currently gets Note that the amount of awarded bitcoins decreases over time. Ultimately, the value of a bitcoin is determined by what people will pay for it. In this way, there's a similarity to how stocks are priced. The protocol established by Satoshi Nakamoto dictates that only 21 million bitcoins can ever be mined -- about 12 million have been mined so far -- so there is a limited supply, like with gold and other precious metals, but no real intrinsic click here. There are numerous mathematical and economic theories about why Nakamoto chose the number 21 million.

This makes bitcoin different from stocks, which usually have some relationship to a company's actual or potential earnings. Without a government or central authority at the helm, controlling supply, "value" is totally open to interpretation.

This process of "price discovery," the primary driver of volatility in bitcoin's price, also invites speculation don't mortgage your house to buy bitcoin and manipulation hence the recent talk of tulips and bubbles. Bitcoin has made Satoshi Nakamoto a billionaire many times over, at least on paper. It's minted plenty of millionaires among the technological pioneers, investors and early bitcoin miners.

If you're willing to assume the risk associated with owning bitcoin, there is an increasing number of digital currency exchanges like Coinmama, CEX, Bscks and Coinbase -- the largest and most established of them -- where you can buy, sell and store bitcoins. Getting started is about as complicated as setting up a Paypal account. With Coinbase, for example, you can use your bank or Paypal account to make a deposit into a virtual wallet, of which there are many to choose.

Once your account is funded, which usually takes a few days, you can then exchange traditional currency for bitcoin. You can sell it. Or you can just hang on to it. Note that there are no inherent transaction fees with bitcoin, although exchanges like Coinbase typically charge a fee when you buy or what backs up the bitcoin. Short, qualified answer: Yes, for now, as long as bitcpin like any currency -- you don't do illegal things with it.

For instance, bitcoin was the sole currency accepted on Silk Road, the Dark Web marketplace for drugs and other illicit goods and services that was shuttered by the FBI in Since then, bitcoin has largely evaded regulation and law enforcement in the US, although it's under increased scrutiny as it attracts more mainstream attention.

Legal and regulatory hazards aside, as both an investment and currency, bitcoin is very risky. When you wake up in the morning, bitdoin know pretty precisely how much a dollar can buy. The financial value of a bitcoin, however, is highly volatile and may swing widely from day to day and even hour to hour. Exhibit A: December Bitcoin transactions cannot be traced back individuals -- they are secured but also obscured through the use of public and private encryption keys.

This anonymity can be appealing, especially with companies and marketers increasingly tracking our every purchase, but it also comes with drawbacks. You can never be certain who is selling you bitcoin or buying them from you. Opportunities for money laundering abound; inauthorities in the Netherlands arrested 10 men for just. Theft is also a risk. There are few avenues for pursuing refunds, challenging a transaction or recovering such tye.

Once a transaction hits the blockchain, it's final. Because bitcoin is so new and decentralized, there is plenty of murkiness and many unknowns.

Even the technical rules for mining are still evolving and up for debate. The IRS views bitcoins as property, not currency. Even Coinbase, the most established of them all has struggled to keep up with demand, plagued by site outages, scaling issues and customer service complaints. Even if it's venture-backed, every bitcoin player today is by definition a startup and comes with all of the associated risks.

In Augustdifferent sects within the bitcoin mining community had ghe disagreement about the whxt governing the mining process -- specifically, what constitutes the appropriate size in megabytes of a ghe. Unable to form a consensus, uup was a fork in the blockchainwith the bitcoin originalists going one way and the group favoring larger blocks going another to start Bitcoin Cash.

Though they share a common digital ancestry, each now has its own individual blockchain with slightly different protocols.

Forking is almost assured to happen again in the future. More than a thousandwith more sprouting up every day. Aside from bitcoin, which is the real progenitor of them all, other well-known alternative currencies include Ethereum, Ripple and Litecoin.

We take a look at the pros and cons of each, and how they stack up, in this explainer. Buying and selling bitcoin : A quick and dirty introduction to trading cryptocurrency. Bitcoin, Ethereum or Litecoin : Which is best for you? Be respectful, keep it civil and stay on topic. We delete comments that violate our policywhich we encourage you to read.

Discussion threads can be closed at any time at our discretion. Don't show this. What is bitcoin? Here's everything you need to know Blockchains, bubbles and the future of money. Justin Jaffe. It's been a wild ride. Coinbase You heard about this bitcoin thing? Science Picture Co We're guessing: yes, you.

But first: A bifcoin backstory Bitcoin was invented in by a person or group who called himself Satoshi Nakamoto. Now playing: Watch this: Bitcoin: A beginner's guide. Baccks playing: Watch this: Bitcoin steams ahead as year-long rally shows no sign Discuss: What is bitcoin? Here's everything you need to know Sign in to comment Be respectful, keep it civil what backs up the bitcoin stay on topic.

Some Reasons Why The Bitcoin Price May Never Go Back Up

Yes No. Many, many what backs up the bitcoin have complete records of every transaction in Bitcoins history readily available to them at any point, and anyone bicoin wants in the information can obtain it with ease. Archived from the original on 10 December CNN Money. The most important concerns with such misuse involve loss of privacy and security: both can be put upp jeopardy when addresses are used for more than a single transaction. It is hard categorized Bitcoin because it is so new and different from other assets available to market participants. Many early adopters spent large numbers of bitcoins quite a few times before they became valuable or bought only small amounts and didn't make huge gains. Following the first delivery date in Januarythe CME requested extensive detailed trading information but several of the exchanges vitcoin to provide it and later provided only limited data.

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