Bitcoin Basics: Why People Buy Cryptocurrency
You don’t have to understand bitcoin to realize that banks, businesses, the bold, and the brash are cashing in on cryptocurrency. In 2016, the price of a bitcoin was $710.09. On February 21, 2019, the exchange rate for a single bitcoin was $3,890. It doesn’t take an economics degree to know that the folks who invested in bitcoin a few years ago are now patting themselves on the back — but the good news is, it’s not too late to get in the game.
It may seem hard to believe that a digital currency could be worth thousands of dollars. After all, unlike physical currency like precious metals or printed money, bitcoin is just lines of code. So what makes bitcoin so valuable?
The worth of currency used to be stipulated by precious metals. From 1879 until 1933, for example, Americans could trade the federal government $20.67 for an ounce of gold. For the United States, that all changed at the height of the Great Depression when America faced mounting unemployment rates and spiraling deflation. In 1933, President Franklin D. Roosevelt decided to cut the United States’ ties to gold, effectively allowing the Federal Reserve to pump more money into the economy than the federal government had the gold to back.
The United States now has what is called a “fiat” money system, meaning the dollar’s value is determined by faith, rather than a physical asset. The dollar, for example, is worth far more than the value of the ink and paper that it’s printed on. Bitcoin functions by the same principles. Although the lines of code that make up each bitcoin are worthless in and of themselves, the international market has come to value each bitcoin at thousands of dollars. That’s because bitcoin is scarce and becomes more difficult to obtain over time. Here’s why:
When the bitcoin program was launched on January 3, 2009, bitcoin was produced at a rate of 50 bitcoin every 10 minutes, or 7,200 bitcoin every day. As of February 2019, 7,200 bitcoin would be worth about $28 million, but at the time each bitcoin was worth just a few cents.
According to the bitcoin program, however, the rate that bitcoin is produced cuts in half about every four years. On November 28, 2012, for example, the rate of production changed from 50 to 25 bitcoin every 10 minutes, or 3,600 bitcoin every day. That rate halved again on July 9, 2016 to 12.5 bitcoin every 10 minutes and is expected to halve a fourth time sometime in 2020. At this rate, the total number of bitcoins in circulation will approach a limit of 21 million.
The rate at which bitcoin can be produced cuts in half every four years, meaning that the currency becomes more difficult to obtain over time. In fact, as of February 2019, 17.37 million, or 82.70%, of the total bitcoin have already been created. If the demand for bitcoin exceeds the rate at which it can be produced, the price will increase. That means investing in bitcoin now should be a sure fire bet to pay off four years down the road, right? Well, it’s complicated.
If you’re anything like me, chances are your eyes glaze over at cautionary tales, words of wisdom, and long-winded explainers. That’s all fine and well for the real world, but when it comes to buying and selling cryptocurrency, the most valuable investment you can make is time. Cryptocurrencies are wildly unpredictable, even ones as popular as bitcoin. Although bitcoin is worth $3,890 today, it was also worth $19,783.21 on December 17, 2017.
The value of bitcoin is heavily dependent on (a) the faith of investors, (b) the integration of cryptocurrency into current financial institutions, and (c) the public’s willingness to learn and use a new form of currency. Research is key when you’re investing in stocks, but it’s life-saving when you’re investing in cryptocurrency. That’s why we’ve taken the time to explain the technology behind bitcoin before showing you how to buy it. If you feel ready to leave the training wheels behind, you can skip to “Step One: Sign Up for a Bitcoin Wallet.”