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Bitcoin was founded in 2008 by a person or group of people using the pseudonym Satoshi Nakamoto. On August 18th, 2008, they registered the domain name bitcoin.org. They then authored a paper explaining Bitcoin which was then posted to a cryptography message board on Halloween of 2008. Shortly after, they released the bitcoin software as open-source code in January of 2009, and mined the first block of the bitcoin blockchain.
Bitcoin has since established itself as the world’s most recognizable cryptocurrency, and is credited with popularizing the blockchain method. It is, in theory, a decentralized currency that operates separately from world governments, with the goal of providing stability from economic crashes and allowing for transactions free from government influence. It operates on a reusable proof of work model, where a user dedicates processing power to solving complex equations that then generate a token proving they have done so. Users can then use these tokens, or bitcoins, to engage in transactions which are then stored on a universal public ledger called the blockchain. The hope is that this will not only increase the versatility of available transactions, but their security as well.
The reusable proof of work model that powers token currency like bitcoin shares a similar premise to gold. For instance, while gold has many industrial uses in fields like medicine and aeronautics, and makes for a beautiful adornment, much of its initial value when people first began trading it came from its rarity. This rarity made it a perfect tracker of value, as it gave the metal a natural resistance to inflation. Similarly, mining a bitcoin requires many more technological resources than the average person tends to have, including thousands of dollars in equipment and even more in electricity.
It also takes time. While the most powerful mining farms can generate new bitcoins every 10 minutes, the average computer could run the bitcoin software for decades without even creating a single bitcoin. Essentially, all these expensive material resources used to create bitcoin come together to “back” bitcoin with value due to their rarity and high cost. Like gold, bitcoin in theory should then also hold a degree of stability and resistance to inflation.
In practice, bitcoin acts more like a stock. Because bitcoin is not backed by anything other than the assertion that the algorithms used to produce it carry value, and because it is so new, it often fluctuates heavily with the market. In fact, according to Investopedia, it is common to see bitcoin “moving in excess of 10 percent in either direction within a span of a few hours.” This is because it currently requires faith from investors, whereas gold has centuries of trading verifying its worth. While it’s possible that bitcoin might become more stable and hold a similar place as gold as it becomes more ingrained in the market, its recency means that investors are currently unsure about its place. Thus, when the market is bearish, bitcoin’s price is as liable to fall as anything else.
Still, it has opened up brand new avenues of trade and has helped set the stage for more stable currencies like PAX Gold. Keep up with its price on our charts to see how the market adapts to the new opportunities bitcoin offers.