Bitcoin is the world’s most popular digital currency. But what is it? And how has it performed so far in 2021? Let’s take a look.
Bitcoin: what is it?
Bitcoin is a digital, decentralised cryptocurrency. It was founded in early 2009 by a fictional person (or persons) named Satoshi Nakamoto.
In simple terms, Bitcoin is a protocol that runs on an accounting ledger, known as ‘blockchain’. Blockchain technology holds information in ‘blocks’ and is powered by millions of computers. Therefore, no one person or company is responsible for recording all transactions. As a result, supporters of blockchain technology claim it is very secure.
There are an estimated 18.5 million Bitcoins in existence, and the amount available is capped at 21 million. This means there will never be more than 21 million of them. You can spend Bitcoin on purchases through a small number of retailers, though most people hold the currency, hoping that its value will increase.
How can Bitcoin be earned?
Getting hold of Bitcoin either means buying it through an exchange, or taking part in mining.
Mining involves using computer power to solve complicated mathematical equations. It used to be a popular way of getting hold of the currency. However, as the number of coins available for mining has decreased, the computing power to earn one is now enormous. As a result, it is no longer cost-efficient to mine Bitcoin due to energy costs, in all but a handful of countries where cheap energy is prevalent.
Consequently, buying through an exchange is by far the most popular way of getting hold of the cryptocurrency. That said, it’s worth knowing that a number of cryptocurrency exchanges have been hacked in the past.
Unlike cash in the bank, there is no legal protection if you become a victim of theft. To minimise the risk, many users of the cryptocurrency suggest holding it in an offline Bitcoin wallet.
How is it different from normal currency?
Bitcoin’s decentralised nature means that no individual, organisation or government can influence or control the currency.
For example, in the UK, the Bank of England controls monetary policy. It has the power to increase the money supply by printing money, through quantitative easing. With Bitcoin, no such power exists. That’s because there can never be more than 21 million Bitcoins in existence.
For this reason, many supporters claim the currency is deflationary. This means they think it’s unlikely to lose its value in the long term, unlike traditional fiat money. However, with this in mind, Bitcoin’s price is extremely volatile.
Furthermore, the Bank of England’s Financial Policy Committee warned that anyone buying cryptoassets should be prepared to lose all their money.
How has bitcoin performed in 2021?
Shortly after its launch in 2010, one Bitcoin was worth $0.08. Since then, despite huge peaks and falls, its value has generally headed upwards.
In late 2017, Bitcoin hit the headlines when it reached an all-time high of $19,650. Yet this price was short-lived. The currency fell sharply to just over $6,000 by mid-2018.
Last year, following Covid-19, its price went from just over $5,000 in March 2020, to over $25,000 by the end of the year – a 500% increase.
Fast-forward to 2021 and Bitcoin has shown itself to be an extremely turbulent investment. In January the currency was worth a tad over $32,000, while a month later, its value topped $56,000. By April it passed $60,000, before May saw its value almost half, to $35,000.
June 2021 saw Bitcoin hold between $35,000 and $40,000, while July saw a similar performance, topping the $40,000 mark by the end of the month. Today, its value sits at $39,500 (or £28,418). Whether Bitcoin can repeat it’s previous highs remains to be seen.
Whatever your views on Bitcoin, remember that its value can fall – sometimes dramatically. That’s why many see buying it as closer to gambling than investing.
To learn more about the cryptocurrency, see our article on how bitcoin works.
Investing in cryptocurrency is extremely high risk and complex. The Motley Fool has provided this article for the sole purpose of education and not to help you decide whether or not to invest in cryptocurrency. Should you decide to invest in cryptocurrency or in any other investment, you should always obtain appropriate financial advice and only invest what you can afford to lose.
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