Sunday, April 17, 2016

Let's Bitcoin - Part 1: Why is it Valuable? Is it legal? An introduction

Recently, bitcoin has been the talk of the town again due to a group of people trying to promote bitcoin farming or scheme.

Let's start with the very basic. And what is it exactly?

As of this writing, the conversion rate of 1 Bitcoin is at 431.63 US Dollar. The highest price it have ever reached was USD 1216.73. Why is it so valuable?
The price is set by the market. The demand and supply effect. What's so special about it that there's a demand in the market?

First of all, lets understand the very basic of human nature. Why human nature?
Anything human perceive any object as valuable will have values. Gold would not be valuable if we don't perceive it as valuable. If no one perceived gold as valuable, gold will have no value at all.
There are many reason on why we perceive something as valuable. The main basic reason the need to live. Food and air are basic needs.Without them, we would die.

Next, is psychological needs. We are attracted to things which we feel as beautiful, gold and diamonds gained their value because of that. Then, as demand starts to increase and the value start to increase, it becomes more of needs for our pride. Psychologically also, we love rare items as we feel we are among the few chosen people who have obtained them.

Paintings is perceived valuable with first the artistic beauty in it, then it becomes part some one's collections which also could become a rare item. Each of this stages increases the values.

The next level of adding value is attaching a believe to it. The believe can be supernatural, believe that the value will go up in term of price, the believe that it's good for your health and so on. I'm sure you would have heard of people being cheated of money because they believed certain stone will give them good fortune only to realize that it's fake.

The last reason why we perceive it as valuable is because the society or the system make us to think of it as valuable. Our paper money is perceived valuable due to the system made it valuable. It was made as a legal tender. If you want to buy something, you need the money. Prior to that we were using gold and silver as currencies. We were also using barter system with values attached to it by general public or the government. We can still do barter system based trading, but it's very rare.

This values attached to an object can go up and down depending on how the individual and public perceive them. Collectible items such as toys and comics would only be valuable for a small community who appreciate them, while majority would declare them non-sense. This is how we humans have been living by giving values based on our perceived value. Then, of course speculation could push the price higher that what it supposed to be.

Now, lets look at bitcoin.

Bitcoin is a digital currency (better known as cryptocurrency) which is created by solving certain mathematical algorithm which was created in 2009 by Satoshi Nakamoto. Satoshi Nakamoto is a very mysterious figure as no one really knows who he really is, his true identity has been a question.

So, what you basically own is a piece of encrypted solved mathematical code which have been perceived as valuable. How the heck this was perceived as valuable?  It makes sense if some math geek values it.

It was because a system was enforced by certain group of powerful traders, the underground traders. Instead of transferring physical money, they used bitcoins to do the trading. They created the value and somehow spread to the world we known well. There's 3 other factor on why the bitcoin price is so high. It's getting tougher to mine bitcoin, some merchants recognize it as legal tender and of course, speculation.

Wait. Mine?!? As in mining? Bitcoin is not even physical object, how to mine them? Well, that's the term used to solve the mathematical equation to generate the bitcoin codes.

So, is it legal? Bitcoin is not recognized as legal tender by world's governments. So, there is no government back up to it. The paper money or currencies are actually backed by governments. But not bitcoin. Now, you know the reason underground businesses and tradings is done by using bitcoin. No government tracks them. There is no central bank to monitor any transactions.

Anyway, bitcoin have values and there's no sign of it dying off yet. There are many new similar cryptocurrency came up these recent years. They are only valuable if somebody is using them and they are perceived valuable.

In PART 2, I will explain on how you can invest in Bitcoin, or better how to do your own bitcoin mining. Till then, ciao.

1 comment:

  1. I'm interested with yours article, 1bitcoin = 431.63usd is actually quit high and actually has achieved more than that. AMAZING!!!.

    Even though it is a virtual currency, still it has downside right, this currency will fluctuate depend on how many bitcoin has been minning right? as example oil barrel.

    looking forward for your PART 2. like to try investing in it.