What Is Cryptocurrency and How Bitcoin Functions

The Rise and Evolution of Cryptocurrency in the United States

Investor interest in cryptocurrency has seen a significant resurgence, particularly following the U.S. presidential election in November 2024. With Donald J. Trump’s victory, the market experienced renewed momentum, leading to notable price movements in major cryptocurrencies. Bitcoin, the first and largest cryptocurrency, crossed the $100,000 threshold on December 4 and reached as high as $108,265 by December 16.

However, this upward trend was not without its challenges. By late winter, the market saw a slowdown, with Bitcoin reaching its lowest point alongside other risk assets on April 7, coinciding with President Trump’s announcement regarding tariffs on imported goods. Despite these fluctuations, the second Trump administration has taken steps to shape a more favorable regulatory landscape for the industry.

In August, President Trump signed an executive order that allows investors to include Bitcoin, real estate, and private equity in their 401(k) retirement accounts. This move marks a significant shift in how digital assets are perceived within traditional financial systems. Since early May, Bitcoin has remained above $100,000, hitting a new all-time high of around $123,000 in July.

The growing interest in cryptocurrency has been further fueled by the U.S. Securities and Exchange Commission's approval of the first Bitcoin exchange-traded fund. Additionally, the Trump administration has worked to create a more supportive regulatory environment, which has contributed to increased investor confidence.

Despite these positive developments, it's important to remember that Bitcoin was trading in the $40,000 range in January 2024 and fell below $16,000 during a period known as the "crypto winter" in November 2022. These fluctuations highlight the volatile nature of the market, making it essential for newcomers or those interested in the space to understand the fundamentals before investing.

What is Cryptocurrency and How Does It Work?

Cryptocurrency is a form of digital asset that operates on blockchain technology, serving as a type of currency or store of value. Unlike traditional currencies, which are backed by governments or central banks, cryptocurrencies are decentralized and rely on a network of users to validate transactions.

Blockchain technology enables secure and transparent transactions between parties through a decentralized network of nodes. These nodes verify and record transactions, eliminating the need for a central authority. For example, the Bitcoin blockchain contains a record of every transaction ever made, organized into blocks that are linked together in a chain.

Miners play a crucial role in maintaining the Bitcoin network by solving complex mathematical problems to validate transactions and add new blocks to the blockchain. In return, they are rewarded with newly minted bitcoins. This process ensures the security and integrity of the network while also controlling the supply of new coins.

Why Own Cryptocurrency?

Investors have long debated the merits of owning cryptocurrency, with proponents arguing that it offers a decentralized alternative to traditional finance. By removing the need for intermediaries, cryptocurrencies can democratize access to financial services and empower individuals globally.

One of the key advantages of cryptocurrencies is their potential as a hedge against inflation. Assets like Bitcoin, which have a capped supply of 21 million coins, are often viewed as a store of value due to their scarcity. As the supply becomes more limited over time, the value of Bitcoin may increase, making it an attractive investment option.

Advantages of Cryptocurrency

Accessibility, transaction speed, and transparency are three of the most significant benefits of cryptocurrency. Unlike traditional financial markets, which operate during specific hours, cryptocurrency markets are open 24/7, allowing investors to trade at any time from anywhere in the world.

Faster transaction speeds are also a critical factor in the adoption of cryptocurrencies. While Bitcoin transactions typically take about 10 minutes to confirm, this speed is still faster than many traditional banking processes. However, for everyday use, such as buying a cup of coffee, the current speed may not be sufficient, highlighting the need for scalability improvements.

Transparency is another major advantage of cryptocurrencies. All transactions on the Bitcoin network are public, traceable, and permanently recorded. This level of openness makes it easier for regulators to track illicit activities and increases trust in the system.

Disadvantages of Cryptocurrency

Despite its many benefits, the cryptocurrency industry faces ongoing regulatory challenges. In early June 2023, the SEC filed lawsuits against Binance and Coinbase, two of the largest cryptocurrency exchanges. However, the Trump administration has since dropped both cases, signaling a shift in regulatory approach.

While the industry continues to evolve, it remains relatively young and subject to change. Even with supportive policies and favorable trends, there are still risks associated with investing in cryptocurrencies, including volatility and regulatory uncertainty.

For those considering entering the market, it's essential to understand the complexities of the industry and assess whether cryptocurrency aligns with their investment goals and risk tolerance.