Skyrocketing to the moon and beyond, there’s a growing movement toward the mainstream acceptance of the cryptocurrency known as Bitcoin. As more financial institutions begin to invest in what many are now referring to as “digital gold,” the world is inching closer to a massive paradigm shift that could leave people looking back at traditional currency the same way they look at ancient bartering systems.
These days, it’s becoming much more common to come across a friend or co-worker who’s excited to talk about how awesome Bitcoin is. While numbers vary depending on the source, it’s estimated that 80% to 90% of Americans are familiar with some type of cryptocurrency. That’s a shockingly high level of awareness and is indicative of just how far cryptocurrency has come since its inception. Now, with 10% of Americans owning Bitcoin, it’s important for people to have a basic understanding of how the currency operates and the mysterious history behind its creation.
What Is Bitcoin?
Bitcoin was created in 2009 using the plans laid out in a whitepaper written by someone under the pseudonym Satoshi Nakamoto. The true identity of Bitcoin’s originator has never been revealed, leaving room for speculation among the crypto community and Bitcoin detractors. There are rumors that if Nakamoto were to ever reveal his true identity, the entire Bitcoin market could destabilize and come crashing to the ground. However, there’s no evidence that Nakamoto, or anyone for that matter, holds anything but a limited influence on the market.
In fact, what makes Bitcoin revolutionary is that it is completely decentralized, free from the constraints that come with fiat, or government-controlled currencies. More importantly, though, unlike traditional fiat, there’s a finite supply of Bitcoin. Nakamoto intentionally set the limit on the number of Bitcoin that could ever exist to 21 million.
Although the reason behind setting the supply specifically to 21 million remains a mystery, this limitation essentially prevents Bitcoin from falling into inflation. So while governments can keep printing fiat until the trees run out, Bitcoin functions as a limited commodity similar to gold, minus the physical limitations of a heavy metal brick.
What Are Blockchains?
Like any other precious metal that’s bought and traded on the market, Bitcoin is procured through a process known as mining. Unlike its physical counterparts, though, Bitcoin is mined electronically using powerful processors. The process may seem complex, but basically, each Bitcoin transaction is processed by a large network of computers running specialized software. During a transaction, the software records both the sender’s and receiver’s Bitcoin addresses along with the amount transferred, and it enters that information onto a blockchain.
Anyone put off by the introduction of another amorphous digital term can simplify things by thinking of a blockchain as a virtually counterfeit-proof database. It’s essentially a group of encrypted transactions permanently linked together. Every Bitcoin transaction is added to a “block,” and when that block is full, it’s “chained” to another block — hence the blockchain name. During this procedure, every single computer that processes Bitcoin verifies each blockchain’s accuracy, ensuring that it is nearly impossible to counterfeit.
Simple enough, right? Well, the important thing to remember is that blockchain is the technology that makes Bitcoin work in a safe and secure manner. However, this technology isn’t limited to securing cryptocurrency. While Bitcoin has been around since 2009, recently, there has been a whole new crypto investment phenomenon that is even more difficult to understand than digital money.
What Are Nonfungible Tokens (NFTs)?
Nonfungible tokens, or NFTs, are taking the internet by storm. NFTs are encrypted digital tokens that use the same blockchain storage method as Bitcoin. Unlike Bitcoin and other cryptocurrencies, each NFT is distinct and cannot be exchanged equally for other NFTs. To put it simply, a $100 bill can be traded for another $100 bill because there’s no difference in value between the two; that’s what makes them “fungible.” A nonfungible asset, however, cannot be exchanged the same way.
There’s a lot of utility behind NFTs, as they can be used to represent items both physically and digitally. Oddly enough, many of the most valuable NFTs have been digital images of physical artwork or trading cards. To add to the apparent absurdity of NFTs as a concept, Twitter CEO Jack Dorsey recently sold an NFT of a link to the first-ever tweet for a whopping $2.9 million.
Individuals unfamiliar with NFTs will read that and be completely dumbfounded by the idea of anyone paying such a price for something that could easily be saved as a screenshot. It’s true that the value of NFTs is subjective; however, their real value comes from the same technology that makes Bitcoin work so well.
The encrypted address behind each NFT is added to a blockchain, making it a permanent and transparent asset that can be verified by anyone. So while anybody can save a screenshot of the first-ever tweet, only one copy of the NFT sold by Dorsey exists. It’s this combination of digital representation and blockchain security that makes NFTs distinct assets.
Currently, most of the large transactions on the NFT market revolve around the auctioning of digital art by well-known artists and influencers. YouTuber Logan Paul recently made headlines after raking in around $3.5 million by selling digital drawings of himself as an anime character. He’s not the only one: Lindsay Lohan sold a picture of her face for $17,000, which was then upsold for $57,000. Even though anyone can buy, sell and create their own NFTs, it certainly seems like high profile individuals have a leg up on everyone else.
Expectations for NFTs and Bitcoin are high among people in the crypto community, but plenty of skeptics still question the nature of these digital assets. However, Bitcoin’s recent surge has done much to silence critics of the currency. The cryptocurrency is reaching new all-time highs nearly every month since December. Furthermore, Tesla’s February purchase of $1.5 billion in Bitcoin, and its subsequent announcement that it is now accepting Bitcoin payment, has legitimized the currency in the eyes of larger financial institutions.
As Bitcoin’s value continues its upward trajectory, and faith in traditional fiat declines, these financial institutions are eyeing the digital currency with a much bigger appetite. Who knows? It might not be long before you see Bitcoin checkouts at Walmart and people buying digital NFT artwork to hang in their virtual homes.