By Jonny Lupsha, Wondrium Staff Writer
Bitcoin, a currency with no national backing, soared past $50,000 last week. It was invented 12 years ago and is the leading cryptocurrency. Cryptocurrencies have changed the world in the digital age.
The digital currency Bitcoin rose to new heights last week, breaking $50,000 in value for the first time in its history. Invented in 2008, the cryptocurrency started as a pioneering form of e-money in use in 2009, backed by no government and no central bank. Owners simply buy and sell units—or portions of units—of Bitcoin in secure private transactions. Like a traded stock on Wall Street, its value rises and falls regularly, and sometimes drastically.
And Bitcoin isn’t alone. Several other cryptocurrencies have rocked the economic world, including Ethereum and Dogecoin. However, despite the amount of money investors have put into different forms of e-money, these digital currencies are seldom understood by the public.
In his video, “The Cryptocurrency Craze,” for The Great Courses, Dr. Connel Fullenkamp, Professor of the Practice in the Department of Economics at Duke University, explained how they work.
In Bit We Trust
If necessity is the mother of invention, Bitcoin is no exception. It was driven by a demand for extreme financial privacy and with politics in mind, even circumnavigating government regulation.
“Most of us take for granted the government’s role in the creation and regulation of money,” Dr. Fullenkamp said. “We might like the fact that the government stands behind the US dollar, but there’s always been a libertarian school of thought which argues that money should be privately provided and regulated instead.
“This debate has profoundly affected the history of the monetary system in the United States.”
Dr. Fullenkamp said that money must provide three basic services. First, it must maintain its value over time. Second, it has to be universally accepted as payment for goods and services. Third, money must function as a way to measure earnings, expenses, debts, and assets. While cryptocurrencies often maintain their value, the attraction to them is that their anonymity and privacy will generate the second and third basic services of money: More retailers will accept them as they grow and they will become more appealing as expense measurements.
Putting the “Crypto” in “Cryptocurrency”
“A truly anonymous currency must come with some way of tracking ownership and making transfers without a central institution to oversee those accounts and transactions, and the currency must find a way to maintain its value,” Dr. Fullenkamp said. “In 2008, a white paper released under the name of Satoshi Nakamoto described the system known as Bitcoin, followed by the supporting computer code. And in January 2009, Nakamoto mined the first coins, bringing Bitcoin into existence.”
Mining, in this sense, is the process of spending computing power to process transactions, secure the network, and keep the system synchronized. Satoshi Nakamoto is likely a pseudonym, and Bitcoin’s inventor remains unknown, but the currency does maintain value due to supply limitations and creation limitations. Dr. Fullenkamp said it should take until the year 2140 to mine all 21 million Bitcoins, the hard upper limit set by Nakamoto.
Additionally, users remain anonymous.
“Nakamoto achieved this by combining two standard cryptographic techniques: a public-private key system and cryptographic hash functions,” Dr. Fullenkamp said. “The public-private key secures payment instructions; users exchange these instructions via coded digital signatures. The hash function is embedded in the record of all transactions, in a way that immediately reveals whether any part of the record has been tampered with.”
The future of Bitcoin and other cryptocurrencies is unclear, but for the time being, they seem to have found a way to maintain value and keep users anonymous and private, which is appealing to many.