Just a few years ago, Bitcoins didn’t exist. Today, they hold a combined worth of over $7 billion. So, what are Bitcoins, how are they worth so much and how did they get so popular in recent months?
Back in 2008, a person (or group of people) going by the name: Satoshi Nakamoto developed the original Bitcoin software that allows people to “mine” for coins. That man (or group) still holds on to 1,000,000 Bitcoins (BTCs), which has a value of over $600 million as of today.
In order to distribute this new crypto-currency as fairly as possible, it was decided that users would need to “mine” for coins by solving increasingly complex equations. The equations are built in a way that you need the answers from previous equations in order to solve the next ones and earn coins. The equations can only be solved using brute force, and as more equations have been solved, they get more complex. These equations do not have any real world purpose, except for the fact that they are used to improve the security of the Bitcoin infrastructure.
When Bitcoin was first getting started in 2009, a single machine could mine around 100 BTCs daily. In 2011, it was closer to 10 per day. These days, it will take over 100 years for a typical computer running 24/7 to mine a single BTC. There are companies that have profited wildly by selling machines specially dedicated to mining for BTC.
What makes Bitcoin different from the popular paper currencies of our day is that there is a set limit to the number of coins that will ever be in circulation. Currently, there are just over 12 million available and the limit is 21 million. There is also no central authority that can determine who gets the new BTCs as they are mined. Over the past five years, we have seen some scary things happen with the world economy, and governments have been trying to fix these problems by printing more money and putting it in circulation.
This is a short-term solution, and can lead to severe inflation and a devalued currency. Also, the currency is virtually untraceable. This is one of the reasons it was used as a means of exchange on the Silk Road, a website that offered a catalog of illegal drugs that could be delivered to your front door, until it was shut down by the FBI.
So the next question: why are Bitcoins worth so much? It seems counterintuitive since they were created out of thin air and are not backed by anything physical. When BTCs were first being mined, they were pretty much worthless. This is because it was a relatively unknown currency, and few people accepted it as a means of exchange. In fact, it was so worthless that someone traded 10,000 BTC for a pizza in May of 2010. Today, those 10,000 BTC could have bought a mansion in Vegas!
Fast-forward a couple of years, and BTC has gained some traction. Possibly due to increased uncertainty in the world economy, the price of one BTC went from $13 to a peak of $266 in April 2013 before dropping off again. Then the next major headline for BTC was that the Winklevoss twins (famous for their feud with Mark Zuckerberg) purchased a large amount of BTCs.
As BTC slowly began to gain traction in the mainstream media, its value increased, eventually reaching a value of $1,000 per coin on November 27, 2013. This was a big milestone for BTC and is the reason why there has been so much press surrounding it in recent weeks. Now, more retailers are beginning to accept BTC as a means of payment, so you can use your BTCs to buy a beer, car, or anything on Overstock.com.
So should you invest in Bitcoin? It is hard to predict the future of this crypto-currency, but given its recent explosion in popularity, it doesn’t look to be going away any time soon. If you want to learn more about Bitcoin, here is the official website.