Over the past year, bitcoin has soared in value, reaching as high as $19,000 per coin. But what exactly is it, and how does it work?
The first time monetary value was assigned to bitcoin—a theoretical, nebulous token exchanged around the Internet—was in 2010 when a Florida programmer traded 10,000 coins in exchange for two Papa John’s pizzas. With that trade, one bitcoin was assigned an initial value of less than a quarter of a penny.
Today, a single bitcoin could purchase 1,500 Papa John’s pizzas, pay for delivery, and provide an extremely generous tip for a driver.
Over the past year, bitcoin has soared in value, withstanding heart-stopping crashes and reaching closing prices as high as $19,000 per coin. The currency’s ability to climb rapidly in value has attracted not only those who use it as a form of digital payment, but also speculators who’ve bought in as investors with the hopes of getting rich quick. (Full disclosure: the author of this article owns .0067 of a bitcoin, and larger fractions of other cryptocurrencies not mentioned here.)
But what is bitcoin and how does it work? And what does the craze tell us about the future of finance?
The concept of cryptocurrency was first described in a 2008 white paper published under the pseudonym Satoshi Nakamoto. Nakamoto’s identity has never been made public, but whoever it is shuttered their online presence in December 2010, disappearing into obscurity with about a million bitcoins—an alleged stash that would now be worth more than $10 billion.
The system Nakamoto described was a way of exchanging currency without the use of a centralized bank or mint, with transactions occurring directly from person to person and protected by advanced computer encryption. Cryptocurrencies are highly secure, in part because varying degrees of anonymity are provided to users, but also because the digital network doesn’t rely on a single server or institution like a bank to control or store records.
Since Nakamoto first introduced bitcoin to the world, several other forms of cryptocurrency—collectively called alt-coins—have also risen in popularity. In 2013, Johns Hopkins cryptographer Matthew Green helped develop a form of cryptocurrency called Zerocoin with a group of graduate students. Their concept has developed into a commercial currency called Zcash, which now has a $1.7 billion market cap.
“The biggest concern is that we’re in the middle of this crazy bubble, and that it’s all going to burst,” Green says. “If it does, people are going to look at the underlying technology and say, ‘Wow this is a disaster, let’s never talk about this again,’ and I’d be really sad about that because I think this is an amazing and promising area.”