Bitcoin is coming of age: make sure you own some

Bitcoin has consistently been underestimated by its critics. Yet now it’s on the verge of being adopted by institutional investors and corporations. Dominic Frisby explains why you should have a little in your portfolio.

By Dominic Frisby

Published 29 January 2021 In Features

(Image credit: MoneyWeek bitcoin cover story illustration)

Bitcoin is more than a decade old (it’s been around since 2009). But plenty of people are still baffled by it. So here’s a quick run-through of the basics. Bitcoin is a system of digital money, designed for the internet. It is apolitical – in other words it isn’t issued by any nation’s central bank. Instead, it is created by a process known as “mining” (more on this in a moment). It was devised in reaction to the money-printing of 2008. Its creator, Satoshi Nakamoto, wanted to create a system of money which was immune to the whims of those with political power, and could not be created at will. Bitcoin’s inflation rate (the rate at which it is created) is transparent and set in code. There are currently around 19 million coins in existence (each coin is divisible to eight decimal places) and the maximum number will be 21 million. Bitcoin’s price is set by the market – what people will pay for it.

Why do we need bitcoin when we already have electronic pounds, for example? This is where the “crypto” bit comes in. When you “spend” £100, your bank, the payment processor, and the receiver’s bank all need to coordinate. Your bank confirms that you actually have the money, and marks your account down by £100, while the receiver’s bank marks their account up by £100. Bitcoin does something quite different. It’s underpinned by a giant database, which records who currently owns each bitcoin, as well as the transaction history of each coin. This is the “blockchain”.

The blockchain isn’t controlled centrally. Rather it is decentralised, maintained by a network of super computers, which process and verify all the transactions. All transactions are publicly visible. In exchange for processing transactions, the computers receive newly-created bitcoins as per Nakamoto’s programme. The more powerful the computer, the more bitcoins they receive. The more powerful the computer, the stronger the network becomes. This process is known as “mining”.

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What’s the upshot of all this? It means a few things. It means that bitcoin is more like a digital form of hard cash, rather than an electronic pound. When you send a bitcoin to your friend, it’s like handing him or her a pound from your pocket, rather than just adjusting your bank balances. There is also no central authority involved. Bitcoin cannot be debased. In short, bitcoin is a globally transferable asset, in limited supply, which relies on no counterparty for its value. No wonder some call it “gold 2.0”.