It would be nearly impossible to find a person who has not heard of Bitcoin these days. What exactly is a Bitcoin? And what are the distinct differences between Bitcoins and Cryptocurrencies? Jaipuria Institute of Management’s Finance students elaborate it for beginners looking forward to invest in the Crypto world.
It is a cryptocurrency and worldwide payment system. It is the first decentralized digital currency. It works on a peer-to-peer model, in that transactions take place between users directly, without an intermediary.These transactions are verified by network nodes through the use of cryptography and recorded in a public distributed ledger called a Blockchain. Bitcoin was invented by an unknown group of people under the name Satoshi Nakamoto and released as open-source software in 2009.
Bitcoin is pseudonymous, which means that funds are not tied to and real person or entity but rather to Bitcoin addresses. The owners of theses addresses are not explicitly identified, which has led to fears of Bitcoins being used to fund terrorism and other illegal activities.
Bitcoins and Cryptocurrencies constantly manage to make news, not least because of their innovative nature. A while back it was the euphoria of rising Bitcoin values – towards the end of 2017, each Bitcoin was valued at nearly $20,000, up from just $2,500 in the middle of the year! More lately it is because of the inevitable correction and regulatory crackdown on transactions.
Bitcoin and Cryptocurrency are terms that are used interchangeably by many. But are they the same? Let us understand some key points of differentiation between the two:
What they are?
Cryptocurrencies: A Cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency, establish authenticity, and verify the transactions.
Bitcoin: A Bitcoin is a type of cryptocurrency, or digital private currency, which operates on the encryption technique. Though widely accepted as a currency or medium of exchange, a Bitcoin does not have any legal backing from any central bank.
Are they legal?
Cryptocurrencies:Any cryptocurrency launched as a sovereign digital alternative to the prevailing currency is legal. These are backed by the sovereign currency to the extent of value encrypted in it.
Bitcoin: Bitcoin has no such value since it a private currency in digital form. Bitcoin is not backed by any asset or real currency.
The main difference (and advantage!) of Bitcoin is the network effect. The network effect is a phenomenon where increased numbers of adoptersincreases the value of a good or service because everyone then wants to be on the same network, leading to a circle of growth. This has led to more exchanges, more merchants, more software and more hardware that support it. Bitcoin is far more liquid and trades in much larger volumes than every other Cryptocurrency. Moreover, the security and reliability of Bitcoin has been proven over 8-9 years of growing use.
The flipside of this network effect and popularity is the volatility of Bitcoin value. From a peak of $20,000 in December 2017, prices corrected rapidly to below $7,000 in just February 2018!
As things stand, given Bitcoin’s popularity and wide acceptance, an alternative Cryptocurrency can probably succeed only if it is strongly backed by multiple regulators who actively discourage the holding, trading, or acceptance of Bitcoins.