For 11 years on the trot now, Bitcoin (BTC) has been embarrassing its naysayers.

“It’s not backed by anything,” says a prominent expert on traditional markets. “It’s a bubble and it will go to zero dollars,” says another.

To understand why Bitcoin continues to soar in price, you first have to understand what ‘money’ is, at its core.

Money is a way to transfer value from one person to another, using something other than the items of exchange themselves.

Traditionally, money itself was only worth what backed it. Once upon a time this was gold.

So, money was essentially an IOU on printed paper that represented ‘x’ amount of gold. This was known as ‘the gold standard’.

But by 1973, the governments of the world had abandoned the gold standard, instead issuing a government guarantee to give money its value.

This paper money made legal by government decree is known as ‘fiat’ money and is not backed by anything physical. This has allowed governments to print money as they needed, adding to the supply but without adding additional value.

This constant debasing of fiat money is known as ‘inflation’. Bitcoin is different because its value comes from its users. People give Bitcoin its value by investing their own assets into it.

So, if we think of fiat money as being controlled by the government with its value being decided by the government, then Bitcoin is controlled by its users, with its value being decided by its users.

One of the key points of difference is the control that governments have over fiat money.

Bitcoin is decentralised. It cannot be shut down, no person or organisation can decide its value, and it’s almost impossible to hack.

What is blockchain?

Bitcoin is not just a currency; it’s only the first application of the underlying technology known as ‘blockchain’.

Blockchain is a system of ‘blocks’ of computer code that identify transactions and their owners.

Perhaps the most important feature of Bitcoin is that it’s deflationary. To understand this, we must cover how Bitcoin enters circulation.

The Bitcoin supply increases through a pre-determined protocol in which ‘miners’ race to solve a complex hashing puzzle.

There’s a new puzzle every 10 minutes and a new block is added to the Bitcoin blockchain. Think of it like a ledger.

The miner who solves this problem gets to add a fixed amount of Bitcoin to the ledger and do with it as they please.

The more powerful the miners’ computing equipment, the more likely they are to win – and the more Bitcoin they will mine.

There are only 21 million Bitcoins and by 2140, all the world’s Bitcoin will have been mined.

In a planned strategy, every four years, the block reward for the miners is halved.

This event is part of Bitcoin’s protocol and can’t be stopped.

The reward for miners started at 50BTC in 2009 and after many ‘halving’ events, the 2020 halving brought that down to 6.25BTC. The halving is always followed by a run on the cryptocurrency, where Bitcoin leaps in value.

It’s also estimated that up to 20 per cent of Bitcoins have been lost.

So, let’s recap.

We have a secure, digital, and deflationary asset in hot demand as people look to hedge themselves against a financial system that is centralised, inflationary, and over-encumbered with debt.

Shrinking supply + demand = increasing value. That’s why Bitcoin has value.

What’s Ethereum?

Launched in July 2015, Ethereum is a blockchain that allows ‘smart contracts’.

Think of this as a contract that’s programmable and, once programmed, can never be altered.

It will execute its purpose and is completely rigid.

Any attempt to change the contract will leave a record of transaction on the blockchain, so it’s impossible to alter it without being detected.

The applications for this are endless because it takes out the element of trust from contracts.

It’s important to note that Ethereum is a blockchain and not a currency.

The currency traded on exchanges is called ‘ether’ or ETH, but Ethereum is mainly used as being interchangeable.

Every time a user interacts with the Ethereum blockchain, they must pay a fee in ETH, creating a demand that gives ETH value.

What are Altcoins?

An altcoin is any coin that’s not Bitcoin.

These often see massive growth during bull markets and attract speculators who trade them for huge profits.

But beware, trading altcoins is a high-risk high-reward game, and no one should ever invest money they can’t afford to lose.

This is true for all cryptocurrency investing, but even more so with altcoins.