By Shaina Levin, Business Manager
In 2008, the idea of cryptocurrency was created by a man who uses the pseudonym Satoshi Nakamoto with the goal to decentralize the money system. In 2009, Nakamoto formed Bitcoin, which quickly became the most popular and widely used cryptocurrency. In recent weeks, there has been much buzz surrounding cryptocurrency — and Coinbase’s impending IPO (Initial Public Offering) has only added to the excitement. Taking a step back, one must ask: what is Bitcoin, and is it worth investing in?
The current money system in the U.S. relies on the U.S. dollar (USD) which has been given a legal status by the government. This system is considered a centralized system, in which people trust the banks which keep a ledger of who owns what amount of money on their systems, and this record helps prevent people from copying their money. In other words, this centralized system helps avoid what they call the “double spending problem.” The Federal Reserve, the United States’ central bank, is the center of where money is printed and recorded to effectively run the economy.
Despite the currency system being longstanding, there are still many problems with a centralized system. For example, there can be corruption of authority, as the banks have control over your money and can withhold or freeze your accounts at any time. The people have trust in a bank, who essentially has complete control of their money.
Bitcoin is a form of cryptocurrency, in which the currency is digital by nature. Bitcoin creates a decentralized system which solves the “double spending problem” through the use of complex algorithms to prevent the duplication of currency. Bitcoin includes a transparent and pseudo-anonymous ledger. This means the owner of the Bitcoins has access to seeing all transactions taking place with Bitcoins, but hides the identity of the individuals behind the transactions. By using Bitcoin, users have complete control over their money. The exchanges eliminate the need for a middleman, as banks are not required.
A common and secure website to buy Bitcoins is Coinbase.com. This platform comes as an app as well as the website, and it allows you to exchange either money or another form of cryptocurrency for Bitcoins, think similar to Robinhood but for cryptocurrency. Users are required to create a “wallet,” which allows them to keep track of their money and can be purchased from the Coinbase website or app. Once a user transfers Bitcoins to their coinbase wallet, they will have complete control over their bitcoins.
Bitcoins have become the leading form of cryptocurrency used, but is it worth investing in? While this form of currency is becoming more popular and widely accepted by the likes of companies such as by Microsoft and Expedia, there are still potential risks in investing in this form of currency. While Bitcoin is impossible to duplicate, eliminating the “double spending problem,” it still has risk of theft and fraud.
It is also important to point out that their password protection can cause one to get locked out of their account, losing their Bitcoins. According to Nakamoto, Bitcoins were created to be accessible to all without being controlled by a central authority. This is done through the complex algorithms that allow a user to create his or her own save key only known to them. If someone forgets their password, they have only ten attempts before their Bitcoins are gone forever.
For example, Stefan Thomas is a man who invested in Bitcoins before it became popular. He has now accumulated over $220 million worth of Bitcoins, but since 2012 he has not been able to gain access to their account. He has two more attempts to get into his account before losing all his Bitcoins forever. While he has reportedly “made peace” with the situation, this is a major risk a person is taking when investing in Bitcoins.
Additionally, Bitcoin is extremely volatile and the return on investment is not the classic dividends, earnings, or investments. It’s earnings are dependent on how much someone will pay for that Bitcoin investment in the future.