In early 2017, Bitcoin rose to an all-time high of $1129.87 on January 4. It continues to rise in astronomical numbers. Just one year before, Bitcoin was at the $434 level.
Basics of Bitcoin
Bitcoin is a form of digital “currency”. It is created and held electronically, on a computer. Bitcoins are not paper money like dollars, euro or yen by central banks or monetary authorities. Bitcoin is the first example of a cryptocurrency, which is produced by people and businesses all over the world using advanced computer software that solves mathematical problems.
Satoshi Nakamoto first proposed Bitcoin as a means of payment based on mathematics. Bitcoin is a method of payment or transfer of value that is independent of governmental authorities like central banks that traditionally control money supply and the availability of currency in the global market. In many ways, Bitcoin is a pan-global means of exchange. Transfers are made via computer immediately with low transaction fees. Bitcoin does not flow through the traditional banking system; rather it flows from one computer wallet to another. Bitcoin cannot be held or kept in a pocket or wallet like currency; it is purely a computer-based means of exchange.
Bitcoin is a fixed asset; there is only a total of 21 million coins. Solving the advanced mathematical problems results in the mining of Bitcoins. However, bitcoin is divisible so the growth potential for the exchange medium is unlimited. One of the most interesting inventions that came alongside Bitcoin is blockchain or distributed ledger technology (DLT).
DLT has amazing potential when it comes to traditional operations and settlement ramifications for businesses in the financial as well as other industries. DLT tracks ownership and allows for immediate and efficient transfers of Bitcoin.
Bitcoin has several attributes that set it aside from traditional currencies as a pan-global means of exchange.
Central banks or monetary authorities do not control the number of Bitcoins; it is decentralized making it global. Anyone with a computer can set up a Bitcoin address to receive or transfer Bitcoins in seconds. Bitcoin is anonymous; the cryptocurrency allows users to maintain multiple addresses and setting up an address requires no personal information. The DLT technology makes Bitcoin completely transparent; it stores complete details by an address of every transaction that ever occurs. Transfers of Bitcoin are immediate and once made, they are final. At the same time, there are limited fees and international and domestic transfers are not subject to foreign currency exchange rates and fees for transfer. There are no borders when it comes to Bitcoin.
Is Bitcoin a Currency?
There is a great deal of debate about whether Bitcoin is a currency. The Merriam-Webster Dictionary defines currency as:
- Circulation as a medium of exchange
- General use, acceptance, or prevalence
- The quality or state of being present
- Something (like coins, treasury notes, and banknotes) that is in circulation as a medium of exchange
- Paper money in circulation
- A comment article used for barter
- A medium of verbal or intellectual expression
The official definition of currency may leave you more confused about whether Bitcoin is a currency or something else. After all, it certainly meets some of the characteristics in the definition, but not others.
In September 2015, the Commodity Futures Trading Commission (CFTC) in the United States officially designated Bitcoin as a commodity.
Is Bitcoin a Commodity?
The CFTC’s designation came as a response to a Bitcoin exchange that was offering derivative contracts or options on the value of the cryptocurrency. However, Bitcoin is one of those assets that does not quite fit well into any definition and a historical understanding of what is a currency and what is a commodity sheds light on the argument.
Throughout the course of history, many commodities and even some manufactured products have served as currency.
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