The first cryptocurrency (eCash) made its appearance in 1990, and along with several other attempts at establishing a viable and accepted digital currency, it helped influence the creation of Bitcoin.

There are currently over 19,000 cryptocurrencies that exist, and it is without a doubt that Bitcoin is the best known.

But what is it, how does it work, and most importantly is it worth getting to know?

Let’s discuss.

What is Bitcoin?

Bitcoin (also known as BTC) was publicly launched in 2009 and has since then grown hugely in popularity and value. However, it is known for being hugely volatile.

It is a type of decentralised digital money which you can use to buy, sell and exchange on a peer-to-peer basis without the need for an intermediary such as a bank.

It is controlled by users and stored independently from governments, companies and financial institutions, and any transaction ever made using it exists on a publicly distributed digital record which can be accessed by anyone who wants to look at it.

How Bitcoin works

This type of digital currency is built on a Blockchain.

A blockchain is a linked body of data made up of units called “blocks” which contain information of each transaction using the currency. Entries are then put together chronologically, creating a digital chain of blocks.

With Bitcoin, the process of adding a new block is called Bitcoin mining (due to its correlation with gold which we’ll touch on later).

Blockchains are public ledgers meaning that every transaction detail (such as date, time, total value, buyer and seller information, and unique digital code) can be viewed by anyone, and it is not controlled by any organisation.

Transaction blocks must be verified by a majority of all Bitcoin holders, and the unique codes (which consist of long, random numbers) are used to recognise the use of wallet transactions and must fit the right encryption pattern to be approved.

These codes are difficult to be faked and supposedly add to the cryptocurrency’s security.

Users require a Bitcoin wallet to interact within the Bitcoin network and with it, you can buy, sell, send, receive, and exchange.

What gives Bitcoin its value?

According to Bitcoin themselves, the value of Bitcoin is essentially made up of a group of people believing that it has a value.

It is often compared to gold for three main reasons, and as such, its value reflects that.

The comparisons are:

– It is rare – Bitcoin has a limited supply and only 21 million Bitcoins will ever be made. It is expected that all coins will have entered circulation by 2140.

– It is divisible – One Bitcoin can be split into 100 million pieces.

– It is durable – the digital money is kept online and never lost due to its globally distributed network of independently operated computers.

Bitcoin’s success has also been greatly attributed to the scale and speed of the modern internet.

Bitcoin volatility – the highs and the lows

Bitcoin is known for having high volatility and in the past six months alone, it has crashed in value by more than 50%. However, holders of this digital currency are somewhat used to this, having experienced several booms and busts since 2017 alone.

The price of Bitcoin as a whole is greatly affected by external factors such as the cryptocurrency market itself, and as discussed previously, by user belief.

Research into past Bitcoin booms and busts has shown some typical factors which have both hindered and helped the digital currency, and these may continue to be reflected in years to come.

When the value falls, it will often be during a time of concern where topics surrounding fraud, financial crime and reputational risk are often being speculated by regulators and the wider market. As a result, larger Bitcoin ‘shareholders’ (Bitcoin whales) can then be inclined to cash out.

Booms, however, have been shown to typically come into play with the help of small investors who rush onto the market with the aim to make a substantial amount of profit in a short time.

Should Bitcoin be bought into?

Bitcoin is a topic of great discussion, and future rules from regulators surrounding cryptocurrencies still remain unclear. However, if regulators do succeed in setting rules, then the crypto industry could be built on more trustworthy foundations and potentially offer more stability.

Despite this, Bitcoin is a single stock and therefore, it is not recommended to put a large amount of your profile into any one company.

Like all investments, Bitcoin and other types of cryptocurrency are risky and thorough consideration should be made before making any big decisions about your finances.

Your financial situation is always unique and just because one thing worked for someone else, it does not guarantee that it will work for you.

You should always consult a financial advisor before making such changes as they will always give advice based on your personal circumstances.

Coffey Brooks are a team of Independent Financial and Mortgage Advisers based in Clacton-On-Sea, Essex and are directly authorised and regulated by the Financial Conduct Authority.

Disclaimer – This article has been written for educational purposes, and to the best of our knowledge, all content is accurate as of the date posted. Investing always involves an element of risk and you are never guaranteed a full return on the money that you put in.