By Alon Harnoy, Esq. and Dov Kalton, Of Counsel

If you are one of the select few who has received bitcoins you are quite lucky!!! One bitcoin is now worth approximately $16,800. Bitcoin has been in the news a lot lately and Bitcoin futures began trading on CBOE, a Chicago-based exchange this week. What is Bitcoin? Where did it come from? And, where is it headed?

What is Bitcoin?

Bitcoin falls into a relatively new category of currency known as a cryptocurrency. As distinct from most currencies that belong to a particular country (US Dollar) or jurisdiction (Euro), Bitcoin and similar cryptocurrencies are nationless and decentralized. Rather than having a central bank that manages the currency and its value, Bitcoin operates through a network that is private, peer-to-peer and transactions take place between users directly through the use of cryptography. Transactions are verified by private network nodes and recorded in a permanent, non-erasable public ledger called a blockchain. Bitcoins are created through a process called mining. Put simply, computers solve puzzles and “mine” new bitcoins. The founder of bitcoin built in to the system that only 21 Million bitcoins will ever come into existence at a continuously dwindling pace through the year 2140. Most non-tech savvy people that acquire bitcoin are purchasing previously mined coin in a follow on transaction.

How and when did it start?

The origin of bitcoin is perhaps more mysterious than the method for creating bitcoin.  On August 18, 2008 the domain name “bitcoin.org” was registered.  In November that year, a link to a paper authored by a previously unknown person named Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list. Nakamoto subsequently released the bitcoin software as open source code in January 2009. Around the same time the bitcoin network came into existence when Nakamoto mined the first ever block on the chain, known as the genesis block, for a reward of 50 bitcoins. Nakamoto didn’t explicitly state why he decided to create a new currency but left the following note embedded in the first transaction:

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

The reference is to a Financial Times article from that day and is interpreted by most as an expression of the inventor’s frustration with bank bailouts during the financial crisis of 2008/9 and the need for a decentralized monetary system.

To this day, Satoshi Nakamoto has not been identified and he has not been heard from since 2011.

Where is Bitcoin headed?

For the first few years after Bitcoin was invented it appeared to be a novelty with a strong likelihood of fizzling out. However, by 2014 more and more merchants began accepting payment in Bitcoin and it became clear that Bitcoin was here to stay. The exchange rate for a Bitcoin wavered between several hundred to approximately one thousand US dollars since 2014 but has skyrocketed to new heights since May 2017. On May 20, 2017 Bitcoin crossed the $2,000 barrier and hasn’t stopped ascending. On December 8, 2017 Bitcoin traded briefly at $18,000.

Bitcoin is a mostly unregulated currency and there are tremendous risks associated with such an unregulated currency, including risks related to the ability for overseas parties to use bitcoin to launder money from illicit transactions.  With the introduction of future’s trading on CBOE’s Future’s Exchange, it means that ordinary investors can now make bets based on the future price of bitcoin and we will be seeing a lot more volume of trading related to bitcoin by investors outside the tech-savvy world.  

Why the surge? Stay tuned for Part 2 coming soon……

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