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How Does Bitcoin Work? Is It Really a Bubble?

· January 26, 2018 · 12:00 pm

If you haven’t heard of Bitcoin by now, you’ve probably been living under a rock. However, while many people know what Bitcoin is – and have even willingly put forward large amounts of their own money to invest in it, despite having heard of it for the first time yesterday – very few people know much more beyond that.

You don’t need to know all the technical details behind Bitcoin to get started – that would take far too long – but whether you’re planning to invest in the world’s biggest cryptocurrency or not, a little information about it can go a long way.

A Brief Overview of Bitcoin…

Bitcoin was created in 2009 by an anonymous person or group known as ‘Satoshi Nakamoto’. You can view the original white paper here.

To many, the real value of Bitcoin is not its ability to be used as a currency, but the technology that powers it. This is known as the blockchain. It is a shared public ledger, upon which the entire Bitcoin network relies.

Every single confirmed transaction is included in this blockchain, and once it has been included it cannot be reversed or edited. The integrity of the blockchain is securely enforced with cryptography.

Bitcoin uses a Proof of Work algorithm, meaning it must be mined.

As a result, it goes without saying that the main way to acquire Bitcoin – aside from buying it at an exchange – is to mine it.

What is Bitcoin Mining?

Bitcoin mining works via a distributed consensus system that is aimed to achieve overall system reliability. It is used to confirm transactions.

Upon being included in a block, a transaction will receive a confirmation. When a transaction has been confirmed, it means it has been processed by the network and that it is very unlikely it will be reversed.

When transferring large amounts it usually makes sense to wait for several confirmations, as each confirmation will exponentially decrease the risk of a reversed transaction.

This has multiple purposes. It ensures that the blockchain has a chronological order, protects the network’s neutrality, and ensures that the state of the system has been agreed on by multiple different computers.

Blocks cannot be modified, as this would invalidate all subsequent blocks. As a result, the technology is extremely secure.

Bitcoin mining

Is Bitcoin a Bubble?

A few weeks ago, everyone was clamoring to throw all their money into Bitcoin as fast as they could. Now, you can hardly hear the word ‘Bitcoin’ without the word ‘bubble’ following it.

Bitcoin shows many of the signs of a classic bubble. For example:

However, determining whether it actually is a bubble or not is very complicated, because Bitcoin is an entire industry.

Whether Bitcoin really is a bubble or not is still up for debate. But even if it is a bubble, the biggest question is: how long will it last?

Yale economics professor and Nobel Laureate, Robert Shiller, recently voiced his opinion about this unpredictable cryptocurrency in an interview. He said:

[Bitcoin] might totally collapse and be forgotten and I think that’s a good likely outcome but it could linger on for a good long time, it could be here in 100 years.

However, the co-founder of Glint, the gold cryptocurrency startup, completely disagrees with the idea that Bitcoin is a bubble, and argues that people are simply not looking at the bigger picture.

In an interview, he stated:

Bitcoin is not a bubble, albeit it has all the hallmarks and antecedents that are the precursor to a bubble. The term bubble tends to indicate a price no reasonable future outcome can justify. In price terms, bitcoin and altcoins (alternative cryptocurrencies) are in a bubble. In value terms, bitcoin is not.

How Does Bitcoin Work? Is It Really a Bubble?

What Does the Future Hold for Bitcoin?

This is the big question that everyone is asking.

Bitcoin is still in its early days yet. Less than a decade ago, no one had ever even heard of Bitcoin. Since then, it has managed to shake off its bad reputation as a currency used to buy drugs and trade illegally online. Now everyone wants to own it.

One thing is for sure: regardless of the fluctuations of the price of this cryptocurrency, the technology behind Bitcoin is here to stay.

What do you think? Is Bitcoin a bubble or a bona fide investment? Let us know in the comments below.

Images courtesy of AdobeStock

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