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Bitcoin Hits High Why is it so volatile?

CRYPTO-CURRENCY

What is it?

Cryptocurrency, or crypto, is a form of digital currency. Coin ownership is recorded in a ledger, which is a digital book, that exists in a database that uses codes to keep transactions private, control the creation of more coins, and to verify the trading of coins.

Crypto is digital, with no paper involved, and isn't controlled by one entity, but instead decentralized, so as not to give anybody extra power. When a new cryptocurrency is minted, it is centralized, but when it is finally decentralized, it works through something called distributed ledger technology.

Distributed ledger technology is usually used in the form of a blockchain. A blockchain is an ever-growing list of records (called blocks), which are linked with cryptography. Each block contains a timestamp and transactional data. The ledger is available to all, but the people making the transactions are completely anonymous.

BITCOIN

What is it?

Bitcoin is a form of cryptocurrency. It was created in 2008 by someone or a group named Satoshi Nakamoto. That is a pseudonym, and the actual creator is unknown. There are thousands of kinds of cryptocurrency, but Bitcoin is the most popular.

There are many ways to earn bitcoins. You can buy and sell it, like many do. This is what causes the price to fluctuate. You can mine it, which is a way to get it for "free." Some give it away as a form of payment for completing tasks on the internet, or even playing games.

The first known purchase with Bitcoin was by a programmer who bought 2 Papa John's pizzas for about 10,000 bitcoins. At the time of writing this, those pizzas, now long gone, cost about $539,000,000.

MINING

What is it?

Mining is the process of updating the blockchain and being rewarded for that. Miners are given an equation, and they have to guess the solution to that equation. If they guess correctly, they earn bitcoins and get to write the next page of transactions.

The more power your computer has, the more guesses it can make in a shorter amount of time. If you have a more powerful computer, you will have the equation solved faster than someone with a less powerful computer, allowing you to earn more bitcoins faster than other miners.

Once your mining computer guesses correctly, your mining program chooses which of the pending transactions will be grouped together in the next block. This is the reason it is called a blockchain.

When you guess the solution, a specific amount of bitcoins are paid to you for your time and energy. You also receive any transaction fees from the transactions you managed within the block.

WHAT HAPPENED?

You may remember when you couldn't go anywhere without hearing about Bitcoin. Back in 2017, Bitcoin reached prices of over $20,000 per coin. It then dropped down, and lost about 85% of its value. It has been steadily rising until 2020.

In 2020, Bitcoin's price quadrupled, then rising 70% year-to-date. This week, it rose above $50,000 a coin. There are 21 million bitcoins, putting the total cost at over $1 trillion. Not all of them are available, only about 18.5 million are. This means the market cap is about $980 billion.

There are only 6 companies who have a market capitalization of over $1 trillion. Bitcoin, not even a company, is almost a part of that club.

WHY?

Nobody really knows why Bitcoin increased so much these past few weeks. Many believe it could have to do with Tesla. The company recently announced that they invested $1.5 billion into Bitcoin, and that you will soon be able to pay for Tesla products with bitcoins.

This doesn't make much sense, as Tesla is one of the world's leading environmental companies. It may not seem like much sense, but Bitcoin accounts for lots of pollution. About 0.5% of all energy consumption goes to the mining of bitcoins. This means more energy goes to Bitcoin mining than the entire country of Argentina.

Another reason could be because of increased interest in the stock market. Although Bitcoin (ticker: BTC) isn't technically a stock, it trades like one. After many people heard about the GameStop short squeeze, there has been an increase in interest.

There are controversies surrounding Bitcoin, mainly about its price. Some, like JP Morgan, believe that it has the potential to go even higher than it is now, estimating up to $400,000 per coin. Others, like Bank of America, think it is a bubble. Bank of America even went as far as to call it the mother of all bubbles.

All this publicity leads to more people being interested. As more and more people learn about it, more invest in it, and the price goes up. Of course, there are many other possibilities, but there isn't enough information to have a reliable answer.

MORE BITCOIN EXPLANATION

Please remember to be cautious when investing. Bitcoin is especially volatile, sometimes with a spread of over 3000 points in a day. Only invest money you are able to lose, and remember you are able to buy less than a whole bitcoin at a time.