Can I Buy That With Bitcoin?
If you haven’t heard this question, you will soon. There are an increasing number of companies who now accept online purchases with digital currency, widely known as cryptocurrencies. The world’s first and best-known cryptocurrency is Bitcoin, followed by Ethereum and also, surprisingly, Dogecoin.
Crypto currencies were popularized by Satoshi Nakamoto’s creation of Bitcoin and its usage of block chain technology as a ledger for transactions. The domain name, bitcoin.org, was registered in August 2008 and the Bitcoin network went live in January 2009. To this day, we don’t know if Nakamoto was one person or a team. What we do know is that the underlying code, block chain, revolutionized transaction ledgers.
A block chain ledger means that once the network accepts a transaction by acclamation, the transaction can almost never be changed or deleted and it is viewable to anyone. This creates a level of certainty and complete transparency that makes transactions possible between unrelated parties.
Nakamoto’s reason for creating block chain was to allow people around the world to seamlessly connect and exchange payments outside of the national regulatory framework. These connections allow an instant transfer of currency between unrelated partners. Unfortunately, the connection also allows criminals to receive illegal payments anonymously.
Bitcoin and other cryptocurrencies are not issued by any country and are also not insured or guaranteed in any way. The currencies are created by a process of crypto mining where miners must solve complex computation math problems to add a new block of transactions and generate new coins. By mining, the legitimacy of transactions is also verified to prevent double spending. In addition, miners are eligible to get rewarded bitcoins once they verify one megabyte worth of transactions. This complex mining operation also prevents the oversupply of coins. In fact, Bitcoin has even set an absolute upper limit of 21 million coins.
The theory behind the upper limit is that cryptocurrencies, unlike national currencies, cannot be printed in unlimited amounts. So, what works is that Bitcoins cannot be overproduced and can be transferred easily. What is problematic is the mining process is very energy intensive. For instance, bitcoin mining consumes as much power as the Netherlands use on an annual basis. Also, cryptocurrencies facilitate many types of criminal payments and are only valuable if people accept them. More importantly, cryptocurrencies can lose all their value if people lose interest and decline to exchange tangible products for an intangible computer product.
As of June 9, 2021, El Salvador passed a law that makes Bitcoin legal tender for all transactions. This will provide a real-world test of viability.
The dangers of cryptocurrency make this a gamble and not an investment. Contact your banker today to learn more about your investment options.