This investment insight explains the origins of digital currency and explores its potential as an asset. 

  • Bitcoin was created to provide a new global form of electronic currency as “a peer-to-peer electronic cash system,” with the goal of addressing the lack of trust between counterparties making and receiving payments due to the risk of fraud.
  • One benefit of bitcoin is the pseudonymous nature of transactions, which allows users to maintain privacy; this has also at times attracted unsavory and even criminal transactions.
  • Still in its early stages and subject to extremely volatile price action, especially over the last year, bitcoin’s ability to grow is still up for debate, and the prospect of government regulations to change the structure of cryptocurrency markets remains a wild card.

What is bitcoin and what problem is it trying to solve?

Cryptocurrencies, or digital currencies, have captured the imagination and interest of investors around the world in recent years and in particular in 2017. Three main factors have driven this interest: the role of cryptocurrencies as bold new upstarts in the world of electronic payments; their meteoric rise in value since they were created less than a decade ago; and the perennial search for long-term stores of value in the face of geopolitical uncertainty.

The world of digital currency is an unabashed phenomenon, yet largely a mystery to some— indeed incomprehensible to many—due to its labyrinthine structure. In an effort to provide an understanding of this enigmatic space, this paper will focus on the digital currency world through the lens of bitcoin—the first, best-known, and most dominant cryptocurrency by market capitalization, which created the foundation on which other cryptocurrencies were built.

Please see important disclosures at the end of the article.

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