Bitcoin continues to trade close to its all-time high reached this month. Its price is now around US $34,000 — up about 77% over the past month and 305% over the past year.
First launched in 2009 as a digital currency, Bitcoin was for a while used as digital money on the fringes of the economy.
It has since become mainstream. Today, it’s used almost exclusively as a kind of “digital gold”. That is to say, a scarce digital asset.
In response to the risk of economic collapse due to COVID, governments around the world have flooded global markets with money created by central banks, in order to boost spending and help save the economy.
But increasing the supply of money erodes its value and leads people to look for inflation-resistant assets to hold. In this climate, Bitcoin has become a hedge against looming inflation and poor returns on other types of assets.
What is Bitcoin?
Bitcoin, the world’s largest cryptocurrency by market capitalisation, has a current circulating supply of 18,590,300 bitcoins and a maximum supply of 21,000,000.
This limit is hard-coded into the Bitcoin protocol and can’t be changed. It creates artificial scarcity, which ensures the digital money increases in value over time.
Whereas government-issued currencies such as the Australian dollar can have their supply increased at will by central banks, Bitcoin has a fixed supply that can’t be inflated by political decisions.
Bitcoin is predominantly traded on online cryptocurrency exchanges, but can also be sent, received and stored in “digital wallets” on specific hardware or smartphone applications.
But perhaps the most groundbreaking aspect of the Bitcoin network is that it draws on the work of cryptographers and computer scientists to exist as a blockchain-based digital currency.
A public blockchain is an “immutable” database, which means the record of transaction history can’t be changed.
A functional and decentralised digital currency
Bitcoin is “decentralised”. In other words, it functions via a dispersed peer-to-peer network, rather than through a central authority such as a central bank.
And it does this through the participation of Bitcoin “miners”. This is anyone who chooses to run software to validate Bitcoin transactions on the blockchain. Typically, these people are actively engaged with cryptocurrency.
They are rewarded with bitcoins, more of which are created every ten minutes. But the reward paid to miners halves every four years.
This gradual reduction was encoded into the network by creator Satoshi Nakamoto, who designed it this way to mimic the process of extracting actual gold — easier at first, but harder with time.