Crypto as an inflation hedge

Here's How Bitcoin Works

Bitcoin, the first and most valuable cryptocurrency, has grown from a fringe experiment into one of the hottest tickets in global finance. As of November 2021, the combined worth of all bitcoins was more than $1 trillion, exceeding the market capitalizations of some of the world's most valuable companies — such as Tesla, Berkshire Hathaway, and Facebook parent Meta.

 

Bitcoin, also known as BTC, is unlike any other asset to have attained such heights. Rather than representing a share of a company, a bitcoin is a unit of digital currency whose value can fluctuate widely. And it is underpinned not by the economic fundamentals of a company or a national bank, but by an encrypted ledger of digital transactions jointly maintained by thousands of computers.

 

You don't have to be an expert to understand how bitcoin works. While the underlying "blockchain" technology can get quite complex, it's not hard to grasp the basics. Here are some things you should know.

 

BTC definition: What is bitcoin?

 

Bitcoin, launched in 2009, is decentralized digital cash that eliminates the need for intermediaries like banks and governments, using instead a peer-to-peer computer network to confirm purchases directly between users.

 

Fiat money (like the U.S. dollars in your bank account) is backed and regulated by the government that issues it. Bitcoin, on the other hand, is powered through a combination of networking technology and software-driven cryptography, the science of passing secret information that can only be read by the sender and receiver. This creates a currency backed by code rather than items of physical value, like gold or silver, or by trust in central financial authorities.

 

The price of one bitcoin has grown substantially. In April 2011, the price was $1. By the fall of 2021, it was setting all-time highs above $65,000.

 

How does bitcoin work?

 

Each bitcoin (trading symbol “BTC,” though “XBT” is also used) is a computer file stored in a digital wallet on a computer or smartphone. To understand how the cryptocurrency works, it helps to understand these terms and a little context:

 

  • Blockchain: Bitcoin is powered by open-source code known as blockchain, which creates a shared public ledger of transactions organized into "blocks" that are "chained" together to prevent tampering. This technology creates a permanent record of each transaction, and it is at the heart of more than 10,000 cryptocurrencies that have followed in bitcoin’s wake.
  • Private and public keys: A bitcoin wallet contains a public key and a private key, which work together to allow the owner to initiate and digitally sign transactions, providing proof of authorization.
  • Bitcoin miners: Miners — or members of the peer-to-peer platform — then independently confirm the transaction using high-speed computers, typically within 10 to 20 minutes.

 

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Forte Innovations is back-office firm that provides cryptocurrency and ecommerce accounting, bookkeeping, Controller & CFO consulting services.  We are not a public accounting firm and does not provide services that would require a license to practice public accountancy.