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Understanding Bitcoin

by Julie Mendel | Oct 16, 2018

A Closer Look at Cryptocurrency and Blockchain Transactions

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Bitcoin is a currency that has been dominating headlines in financial news, and due to the uncertainty regarding this currency, a closer look is warranted.

Bitcoin is a cryptocurrency—a digital currency that is secured through codes that cannot be read unless you have a key (cryptography). Although bitcoin isn’t the only cryptocurrency, it is the most popular.

Bitcoin is global and is not controlled by any central government. An algorithm developed by bitcoin founders makes the determination of how many bitcoins are produced and how many will be added to the economy each year. Bitcoin is 100 percent reliant on blockchain technology, meaning that without blockchain, bitcoin would not exist.

Blockchain transactions are grouped in blocks and chained together through cryptography, using technology that creates a decentralized and unalterable ledger, or database, of all transactions. This means that anyone can see the database and add to it; however, no one can change it. Bitcoin transactions are, therefore, static and will never disappear.

Blockchain technology is the reason bitcoin transactions occur much faster than transactions involving traditional currency. The immutable nature of blockchain eliminates the need for a middleman to determine whether a transaction is legitimate, which, in turn, eliminates the need for involvement of banks or other financial institutions.

Bitcoin is not without concern and one major concern is its volatility. While bitcoin is like gold and other precious metals, it is rare. In fact, after 2140, the bitcoin algorithm expires. This means that no more will be added to the economy.

Since inception, bitcoin has provided a bumpy ride for investors. Industry experts have noted that its bitcoin trades are six times more volatile than the S&P 500. Driving this volatility are concerns about government regulations and disagreements within the bitcoin community.

Another concern is the false sense of security created by the blockchain, making investors overly-confident and opening themselves up to theft. Hackers are likely to find a way to penetrate an unsecured blockchain and steal bitcoin. Security is key in protecting the blockchain and, as a result, the bitcoin.

This technology is creating quite a splash in the financial services pool. For additional information on bitcoin and cryptocurrency, check out WebCE’s course Initial Coin Offerings.