What Exactly is a Bitcoin?

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Last month, there was a news regarding a teenager who invested US$1000 into Bitcoin when it was at US$12 per Bitcoin. He also made a bet with his parents that if could become a millionaire by the age of 18, he would not go to college. He has already won that bet because his investment in Bitcoin is now worth more than a million dollars now.

That is an interesting story but what exactly is a Bitcoin?

I’ll be honest. I used to think that Bitcoin was just a crazy idea and that it is a bubble waiting to be destroyed. Yet, over the years, and after some researching into what Bitcoin really is about, I have sort of accepted that Bitcoin isn’t that crazy an idea after all.

Bitcoin is designed to be a decentralized currency that is not under the control of any government and can be used as a digital gold for users. Similar to gold, its value is sustainable only if the users still see a value in it.

What is interesting about Bitcoin is the way the decentralized system works and it is called Blockchain. It is a technology that provides a decentralized ledger for users to record data. In Bitcoin’s case, it is the transaction. So, there is no centralized party that is maintaining the system and there is no one party that manages all the transactions. You can send Bitcoin to anyone and everyone else in the system will help verify the transaction.

Although the idea seems quite far-fetched, such open source systems are already quite common, especially in the technology space. Operating systems like Linux, browsers like Mozilla Firefox and file sharing platforms like Bittorrent are all products built on decentralized platforms. But the idea of money being decentralized is quite new.

Bitcoin is one of the first products created through the blockchain technology, but there are many new advancements in this field. One such movement is Ethereum, currently the main blockchain platform. Ethereum, allows anyone to use its platform to create a product based on its blockchain technology. They call it the Smart Contract. Thus, in theory, I can create a Smart Contract for my company to manage all my legal contracts, employee benefits, shareholders’ structure and just about anything I can think of. I can even use Ethereum to create an initial coin offering (ICO) to raise funds for the company based on a currency I created myself through Ethereum.

It is not yet clear what all these applications might result in. But as with all new technology, scammers are one of the first to jump onboard to try out the platform. Searching online on the topic of Bitcoin or Ethereum will result in thousands of scams, marketed as investment funds.

However, I have a feeling that Bitcoin and Ethereum, and the blockchain technology are no longer the bubbles we once thought they were. It seems that these new trends in the market might be here to stay.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns some Bitcoins and Ether.