Bitcoin: The First Cryptocurrency

Bitcoin is the first cryptocurrency ever created. Ultimately, it is a global decentralized digital currency which can be used for transacting and/or storing value without the need of relying on any intermediary (AKA "Middlemen"). Here is a great video explaining what it is.

It was originally created by an anonymous person known as Satoshi Nakamoto in 2008 who wrote a whitepaper explaining the core idea of the innerworkings of Bitcoin and the solution it offers. You can find this legendary Whitepaper here.

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Given its name "Bit- COIN" it is possible to state that Bitcoin is a 'coin' operating on a blockchain (The Bitcoin-blockchain). But to really understand its implications and why it has any value, it is best to think of Bitcoin as a currency with the purpose of functioning as a medium of exchange and/or storing value. Thus, with this perspective one can find that Bitcoin is today's best form of sound money as it excels some essential qualities required for money. This primarily includes scarcity, portability and divisibility. Firstly, Bitcoin has a characteristic which has been unheard of in the world of finance; it is purely scarce. Meaning we know exactly how many Bitcoin exist at this minute, how many will ever exist and the supply of coins entering the market every year, week or even minute. Given its digital nature, it is also highly portable with you being able to access and transact with it anywhere in the world at any given time. Finally, the divisibility of a Bitcoin is incredible with it being able to be divided into 0.00000001 BTC. These are just some of the qualities which make Bitcoin unique to alternative mediums of exchange and store of value assets. Read more on these qualities here.

 

 

As stated in the Whitepaper, Bitcoin is a functional peer-to-peer version of electronic cash system allowing for direct online payments between parties without the need for financial institutions. Whilst also solving the double-spending problem which was previously the primary reason behind the need for a trusted third-party previously.

This system is possible through a variety of innovations and technological solutions which are simple but quite challenging to grasp.  At its core, Bitcoin is run on a blockchain which can be thought of as a constantly updating digital, distributed ledger containing all transactions which have ever occurred. The key term there is that it is distributed, meaning that it is public and contained on numerous computers simultaneously rather than on a single, centralised database. With the lack of a central authority, the transactions themselves are verified by participants who create and verify "blocks" of transaction information. These types participants are called miners.

A transaction on Bitcoin works through a mixture of digital signatures and proof of work mining. In which, digital signatures provide an assurance that a transaction between Person A and B is authentic and not forged. A digital signature is split into interrelated parts; a private key and a public key. The private key can be seen as the signing where you confirm a transaction is being made, producing a digital signature for that transaction. A public key is then created which is used to verify if the transaction was really confirmed to have been made by your private key. This process is done through a 'signing' and 'verifying' algorithm which ensures security. This verification process is done essentially by computers solving complex mathematical formulas which require significant levels of computing power. Thus the name proof of work as verification of transactions are done the work of computers. These verifiers, aka miners, are as a result rewarded with bitcoins as they verify and create these blocks of transaction information. ​

This explanation is quite simple and may be somewhat hard to grasp. Thus, here is an excellent video.

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Whether Bitcoin actually is superior as a medium of exchange and/or store of value is up for debate. There is no real consensus. In addition, there are polarized opinions on whether the main purpose of Bitcoin is to function as an effective decentralized currency (and thus medium of exchange) or to be an independent and scarce store-of-value asset such as gold, but in a digital form.

Although it was initially created with the purpose of functioning as effective, decentralized,  peer-to-peer digital money, today it is also common to view Bitcoin more as a scarce store of value rather than as the most efficient currency for pure transactions.
Read more about the case for Bitcoin being a store of  value as opposed of only digital money here:

• Is Bitcoin a Store of Value?

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How to Value Bitcoin:

Well, there are no inherent cash flow patterns linked to the existence of Bitcoin. Hence, from a pure financial perspective, using traditional valuation methods, Bitcoin has no value. Although true itself, that argument is really only accurate  if we have assumed Bitcoin to be a productive asset, which it is not. 

 

However, there is no generic true answer to what Bitcoin really is. It can be viewed as a network of participants together building this thriving  ecosystem, just like Facebook and Instagram, but in  a decentralized way. If that is your  assumption, then it is more accurate to value Bitcoin as a network and as a monetary system. 

 

On the other hand, you could perceive Bitcoin as the ultimate store-of-value asset, competing with gold, property, land and so forth, which will change the narrative and thus the way we look at its value.

 

Hence, to give a simple answer to how to value Bitcoin is indeed a difficult task. There are many methods available for understanding its present and potential value.

Our recommendation is to read through this guide, where the most commonly used methods are all gathered at one place.

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