Cryptocurrency: What Is Bitcoin and Why Is It Valuable?

Authors: Kimberly Burns, Mahdi Shams

Bitcoin is the world’s first and most well-known cryptocurrency and decentralized payment system.

Its functional basis is the distributed ledger technology known as blockchain through which Bitcoin units are stored and transactions are recorded. Transactions are verified and memorialized in the blockchain, and there are no traditional intermediaries, institutions, banks, or governments required to complete these financial transactions.

The decentralized nature of the blockchain technology that underpins Bitcoin means that it cannot be stored or administered by one person – you can’t stash cryptocurrency under your mattress; it only exists in the blockchain.

Bitcoins are created through a process known as mining.

Miners are persons using sophisticated computers and significant computing power who verify and authenticate Bitcoin transactions by solving intricate equations, known as cryptography. Once a transaction is verified, it is added to a block in the blockchain. Completion of a block in the blockchain entitles the miner to be paid in Bitcoin for the effort and resources expended in verifying the transactions in that block.

If you hold Bitcoins, you must store the digital credentials of your Bitcoin holdings (since the Bitcoins themselves always form part of the blockchain) in what is known as a “wallet,” which includes two cryptographic keys that are necessary to access the Bitcoin – a public key and a private key.

Both keys are necessary in order to transfer or otherwise trade Bitcoin on an exchange, or to purchase items. The public key identifies the Bitcoin owner and is available to anyone. The private key decrypts a transfer of the Bitcoin, allowing the recipient to access the currency. This is not like the leather wallet you carry in your pocket, as a Bitcoin wallet is digital also, and can be accessed online or through a phone app. The digital wallet acts like an online banking platform, showing the balance and transactional history of your Bitcoin.

Bitcoin value is based on supply and demand economics, like a fiat currency of a trading society.

Bitcoins have value because people choose to use them to buy and sell items, or to hold them as a speculative investment, and because they are limited in number. Only 21 million Bitcoin can ever be mined.

Bitcoin’s value over the last nine years fluctuated dramatically with a hacking scandal, exchange failures, forks, patchy use and slow public adoption. Last year there was a dramatic increase in government and business attention to Bitcoin, with banks, governments and merchants worldwide taking steps to integrate or acknowledge Bitcoin accounts and exchanges, and to accept Bitcoin as payment.

If Bitcoin continues to interest people and business, the value may stabilize due to increased use and repeated transactions, making it acceptable to the risk adverse public, and creating a widely accepted currency that is not controlled by any central agency.

Our Blog Series

We are excited to bring you a weekly blog series on cryptocurrency, blockchain, coins, tokens, capital market regulations and legal approaches to this new industry. This is our second post, and you can expect to see at least one each week over the next few months. We will bring you quickly up the knowledge curve to water-cooler chat competency; then we will delve into specific legal aspects of the new industry.

If you have questions, or want a particular legal topic explored one week, please contact one of our team members with expertise in this area: Mahdi Shams, Steven Robertson, Kimberly Burns.

Read our previous blog post, “What is Blockchain?”

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Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.