Bitcoin Basics

Get exam ready for March 22. Original BPP ebooks and hardcopy. Get additional 6% off

Bitcoin Basics

How Bitcoin Pricing Is Set

Bitcoin is a digital currency. And like other more traditional currencies, it has a value associated with it. And that value is determined by supply and demand. As the demand for Bitcoins increases, as requests for Bitcoin purchases rise in number that is, the price rises. As demand decreases, as there are more people with Bitcoins to sell them than there are to purchase them, the price drops. So just like other currencies and commodities, Bitcoin's value is very much affected by conditions both internal and external that drives its worth. Let's talk about Bitcoin supply for a moment.

There is a finite amount of Bitcoins. As new buyers make purchase requests, the term is mining, so the coins are mined, new Bitcoins are created. Mining creates new transactions in the Bitcoin ledger, the Blockchain. [On October 4, 2016, it was noted that 15,873,063 Bitcoins were in circulation.] As of October 2016, there were nearly 16 million Bitcoins in circulation. And Bitcoin has a permanent cap of 21 million, so there can never be more than that. So at its current circulation, around 75% of the cap has been consumed. So if all Bitcoins in circulation are currently owned, new purchases create new Bitcoins provided the number of Bitcoins never exceeds the cap of 21 million. So it's clear that the limited number of Bitcoins means demand will drive its price.

As new Bitcoins are created, the rate at which they're created tends to decrease. Because there tends to be a higher degree of trading for existing Bitcoins rather than the purchase of new Bitcoins. The rate at which Bitcoins are created also tends to be predictable, because you can analyze the trading data over time. But also because as the number of Bitcoins in circulation increases, it's more likely people will trade for them rather than purchase them.

Bitcoin is in a fairly volatile market. And we see that just by looking at how its price changes over time. But it's a relatively small market, which helps stabilize things a bit, for the simple reason that the more players lead to greater chance of volatility. Likewise, the limited number of available Bitcoins helps to buffer some of Bitcoin's volatility. Pricing can be affected by many things, though, and some of these are obvious elements that affect any market. Like skepticism and fear. Owners, for example, who misread a situation or react suddenly to an event, a Bitcoin hack for example, tend to panic and dump what they own.

The amount of people and companies that accept Bitcoin as payment has a direct effect on the pricing because it speaks directly to acceptance. If, for example, a major web site were to announce tomorrow that it no longer accepted Bitcoins. That would likely have a dramatic effect on the value of Bitcoins. Then there's the lack of regulations. Governments and agencies have been scrambling to put rules in place and surround Bitcoin with an environment that keeps it from being abused.

The Bitcoin Community

Bitcoin has grown steadily since its inception, and with it is the size of the community advocating for it. The community itself starts with these two sites, The Community Portal and The Wiki Portal. [https://Bitcoin.org/en/community and https://en.Bitcoin.it/wiki/Bitcoin_Wiki:Community_portal URLs.] IRC Channels include #Bitcoin, #Bitcoin-dev, #Bitcoin-otc, or over the counter trading, #Bitcoin-market, and #Bitcoin-mining.

There are many forums and here are a few, BitcoinTalk Forum, Reddit's Bitcoin Community, and Bitcoin StackExchange for Q&A. And on social networks there's the Google+ Bitcoin Community and communities on Twitter and Facebook. The community's been very busy too with all sorts of events happening offline. 

There are also several BitCoin regions and community forums. [The Bitcoin regions are Bitcoin Austria, Bitcoin Center Korea, Bitcoin Italia, Bitcoin Philippine Community, BTCsec.com, BTCsec.com (Russian), Canada's Bitcoin Community, Israeli Bitcoin Community Forum, Polish Bitcoin Community Forum, and Russian Bitcoin Community Forum.] Ranging from Austria to the Philippines to Israel, Poland, and Russia. And there are 45 different community forums held in 31 countries. There's also a tremendous amount of resources for people involved in BitCoin. Or planning to become involved, starting with a number of publications, news sites, and blogs. [The URLs for publications are https://godistributed.com/, https://Bitcoinmagazine.com/,  The URLs for news are https://news.Bitcoin.com/ and https://twitter.com/TopNewsBitcoin/lists/Bitcoin. The URL for blog is https://en.Bitcoin.it/wiki/Category:Blogs. The "Blogs" in the mentioned URL can be replaced with the name of the particular blog, which is to be accessed. The blogs are Bitcoin Economy, Bitcoin Magazine, Bitcoin Market Analysis, Bitcoin Media, Bitcoin Miner, Bitcoin Money, Bitcoin News, Bitcoin News Magazine, Bitcoin Report, and Bitcoin Weekly.] Keep in mind that these are only some of the available resources for BitCoin enthusiasts. And there are new ones coming online all the time.

Bitcoin Units

Currencies are typically based on a primary unit, a dollar or Euro, for example. And then multiplied or subdivided into units. Because different commodities have different values. A pack of gum might cost $0.90, for which you'd use a few quarters, a dime, and a nickel to pay. And using different units to comprise a monetary unit is more than convenient, it's a necessity. Bitcoin is no different. We talk in terms of single Bitcoins with the denominator BTC.

The same way it's impractical to price goods and services in purely integer values. Just dollars or yen, for example. You need to be able to divvy up Bitcoins so you can actually use them to make purchases. With that in mind, the creators of Bitcoin decided to assign a single Bitcoin as having a value of 10 to the 8th power, or 100 million units. It's really quite an elegant solution, because it provides a very high degree of precision over Bitcoin units. And it bucks the common metaphor of integer values that we normally use with hard currency. This was smart, because there was no way of knowing exactly how valuable Bitcoin would be.

And rather than having hyperinflation scenarios where you were buying a pizza with a billion Bitcoin, the total number of Bitcoins in circulation has been capped at 21 million. And a high degree of subunits is favored. The method for subdividing Bitcoins was adopted from the International System of Units. [International System of Units is also called as Système International d'Unités.] Which defines the modern metric system, of which there are seven basic units listed here. [The modern metric system was established in 1960. The seven basic metric units are meter, kilogram, second, ampere, kelvin, candela, and mole.] But these aren't the units used by Bitcoin. Let's take a look at how Bitcoin uses the International System of Units. The Bitcoin system of units uses divisions of 10, just like the metric system. 10 is the number of choice because the Arabic numbering system is base 10. And that's what the world uses to count. It's easy to multiply and divide by 10. And if you're familiar with the metric system, you know how easy it is to work with. Examples of common Bitcoin units are the deciBitcoin, which is 1/10. The centiBitcoin, 1/100. The milliBitcoin, 1/1,000. And microBitcoins, often referred to as bits, which are worth 1/1,000,000 of a Bitcoin. But there are also other systems used to subdivide Bitcoins. Tonal Bitcoin uses the tonal numbering system, which is a base 16 system, and it's not new.It dates back to the 1850s, and has been used as an alternative to the metric system, the base 10 system. [The Tonal Bitcoin is not new to Bitcoin, it dates back to 1859.] The tonal system provides infinite binary division. And I won't get into the weeds here by trying to explain its intricacies. Just to say that people like the tonal system because it provides very granular and precise values of measurement. And there's also the Satoshi system, which is currently the smallest unit of Bitcoin available. It equals one hundred millionth of a Bitcoin. And it was named after the person or persons who invented Bitcoin, known to the world as Satoshi Nakamoto. Satoshis are used by the Bitcoin blockchain, and internally, every amount is measured in Satoshis before being displayed in larger units.

 

If you are keen on enhancing your knowledge as a finance professional, we recommend you to take the ACCA certification on Digital Innovation for Finance. Click here to know more 

Related Posts

Blockchain Technology and the ledger system
Blockchain Technology and the ledger system
Blockchain is revolutionary, maybe as revolutionary as the Internet. But it's certainly shaken to the core the financial
Read More
What is Machine Learning and how do you get started
What is Machine Learning and how do you get started
Machine learning (ML) is a type of artificial intelligence that's having a profound impact on computing and its uses. Ma
Read More
Introduction to Artificial Intelligence - What is Artificial Intelligence
Introduction to Artificial Intelligence - What is Artificial Intelligence
The world of artificial intelligence (AI) includes many areas in computing, which makes it a complex field. ACCA intro
Read More