What is Bitcoin? Why did Elon Musk invest in Bitcoin?

Bitcoin is a digital currency that was created in January 2009. It follows the ideas set out in a whitepaper by the mysterious and pseudonymous Satoshi Nakamoto. The identity of the person or persons who created the technology is still a mystery. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and, unlike government-issued currencies, it is operated by a decentralized authority.

Bitcoin is a type of cryptocurrency. There are no physical bitcoins, only balances kept on a public ledger that everyone has transparent access to. All bitcoin transactions are verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. Despite it not being legal tender, Bitcoin is very popular and has triggered the launch of hundreds of other cryptocurrencies, collectively referred to as altcoins. Bitcoin is commonly abbreviated as "BTC."

To exchange Bitcoin, visit: bitcoin to euro

Understanding Bitcoin

The bitcoin system is a collection of computers (also referred to as "nodes" or "miners") that all run bitcoin's code and store its blockchain. Metaphorically, a blockchain can be thought of as a collection of blocks. In each block is a collection of transactions. Because all the computers running the blockchain has the same list of blocks and transactions, and can transparently see these new blocks being filled with new bitcoin transactions, no one can cheat the system.

Anyone, whether they run a bitcoin "node" or not, can see these transactions occurring live. In order to achieve a nefarious act, a bad actor would need to operate 51% of the computing power that makes up bitcoin. Bitcoin has around 12,000 nodes, as of January 2021, and this number is growing, making such an attack quite unlikely.

But in the event that an attack was to happen, the bitcoin miners—the people who take part in the bitcoin network with their computer—would likely fork to a new blockchain making the effort the bad actor put forth to achieve the attack a waste.

Balances of bitcoin tokens are kept using public and private "keys," which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them. The public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send bitcoins.

The private key (comparable to an ATM PIN) is meant to be a guarded secret and only used to authorize bitcoin transmissions. Bitcoin keys should not be confused with a bitcoin wallet, which is a physical or digital device that facilitates the trading of bitcoin and allows users to track ownership of coins. The term "wallet" is a bit misleading, as bitcoin's decentralized nature means that it is never stored "in" a wallet, but rather decentrally on a blockchain.

Why did Elon Musk invest in Bitcoin?

Tesla made it clear in its statement filed with its regulator the Securities and Exchange Commission that it sees bitcoin as a chance to diversify its cash and cash-equivalent holdings.

Corporations usually hold excess cash and/or cash-equivalents, like Treasury bills or commercial paper on their books to provide operational liquidity and generate returns while limiting risks.

Tesla wrote, “we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity.”

The move isn’t without risk, Tesla acknowledges as the price of bitcoin could slump.

“If we hold digital assets and their values decrease relative to our purchase prices, our financial condition may be harmed,” the company acknowledges.

But a single bitcoin, which has soared 62% so far this year, could easily be headed for a six-digit value if bullish momentum continues to build, which would make Musk look smart.

Publicity stunt?

“Thankfully, Elon Musk on Monday once again ensured no one would be bored, with the unexpected announcement that Tesla will buy bitcoin and accept them as payment for vehicles,” writes Craig Erlam, senior market analyst at Oanda, in a Tuesday research note.

The analyst referred to the move as a “publicity stunt,” a move that everbody is talking about, but there are a number of ways to think about it.