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A Dictionary of Finance
Is Bitcoin a cryptocurrency or a commodity?
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Bitcoin has been all over the financial press throughout the past year or so, thanks to huge volatility (an investment of USD 100 into Bitcoin would have been worth over USD 6.5 million in December, but has since lost half of its value) so we thought we need to try to be able to sound like we know something. Just in case the topic should come up during dinner conversations.
Let’s make one thing clear immediately. The European Investment Bank does not lend in any virtual currency, it does not raise funds in virtual currency, it does not mine Bitcoin, and it hasn’t invested in virtual currency-related businesses. But we do have a guy who knows a lot about it. We invited Markus Willms from the EIB’s Finance directorate’s systems and data management division into A Dictionary of Finance’s studio to explain things. According to Markus,
BOLD
Bitcoin is
- A peer-to-peer network
- A platform
- And a cryptocurrency, meeting the three criteria for a currency: 1) medium of exchange (allowing Bitcoin owners to use it for goods and services), 2) a store of value, and 3) a unit of account-keeping.
Markus explains how Bitcoin was the first to solve the issue of how to avoid counterfeiting a digital currency, or how to avoid the “double-spend problem,” in which a single unit of value is spent twice (or even more).
We also find out how Bitcoin uses something from the real, non-virtual world (electricity) and converts that into a digital, virtual form (a cryptocurrency) by requiring a lot of computing power to do a multitude of calculations or guesses to verify transactions. We then learn about:
BOLD
Blockchain, also known as a distributed ledger, which is a way data may be organized and distributed over a network.
This week’s A Dictionary of Finance podcast also explains
- the hash-function (something Markus describes as a hopper or a funnel, with variable-length input, fixed-length output)
- mining
- the proof-of-work algorithm
- and several other concepts related to Bitcoin.
In fact, there is so much to talk about here, we will have another episode on Bitcoin next week!
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