Financial Background: The Rise of Bitcoins

As technology merged with financial innovation, we watched as our reliance on databases and networks was replaced by AI, blockchain, and cloud computing. These inventions paved way for digital currencies without bank or government interference. We can now execute transactions online and in little time. The first digital currency or “cryptocurrency” Bitcoin was created in 2008 by developer or group of developers under the pseudonym Satoshi Nakamoto. In the ground-breaking whitepaper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” Nakamoto outlines the possibility of a digital currency built upon peer-to-peer networks with rules for determining how much to produce, when, and under what conditions. Bitcoin was successful because it shared the same foundations as a currency: transferability, portability, and scarcity. That said, its value was not tied to any central authority but is instead based on the laws of supply and demand. Because Bitcoin is a virtual currency, there are no physical coins—only a representation of value. It was appealing because it boasted of lower transaction fees, pseudonymity, and speed. Bitcoin’s rapid acceptance is because of its decentralization—meaning that it operates without a central authority.

It wasn’t long before many people started comparing Bitcoin to the commodity, gold. After all, both are precious, valuable, and both have to be mined. In any event, Bitcoin offers several advantages over gold. For instance, suppose an individual finds a mound of gold under their house. They are rich, right? Right, but the market supply of gold would be dramatically affected. The price of gold would inflate very quickly. This is the natural consequence of mining physical commodities—the production rate occurs at irregular schedules. On the other hand, the algorithm of Bitcoin provides that only a certain number of coins be mined at specific times. In other words, the production occurs at regular schedules. Nothing can disrupt a regular system. Even if more people become Bitcoin “miners,” more Bitcoins will not be produced. It will always be the same amount, meaning that it can adapt to anything. People chose to engage in transactions with Bitcoin for many reasons including convenience, speed, pseudonymity, investment, anxiety towards the government, libertarianism, and so forth. And this movement is gaining popularity across the board. Refundo, a U.S. tax refund service, announced in 2019 that it partnered with Bitpay to allow U.S. taxpayers to receive their tax refunds in Bitcoin.

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