Like PCR testing and TikTok dances, “bitcoin” is a term most have heard of by now, but still feels more like the punchline to a joke we don’t fully understand.

So, what is bitcoin?

Bitcoin is a type of currency that’s not backed by a government credit, but instead by crypto-technology and blockchains. It is invisible - there are no physical bitcoins. It exists only in code locked inside computers scattered around the world, and it can’t be used to directly buy much of anything.

When it debuted in 2009, a bitcoin was valued at a fraction of a penny. Today one is worth $42,000. 

Why? For that, we’ll have to return to the original question: What is bitcoin?

Like a cyber-mystic on the mountaintop, Virginia Tech Department of Economics doctoral student Zichao Yang is emerging as a leading guide in cryptocurrencies with a recently published paper, co-authored with Kwok “Byron” Ping Tsang, in the Journal of International Financial Markets, Institutions & Money. Yang focused his dissertation on bitcoin and will graduate this May.

“I started working with Zichao on cryptocurrencies as I found myself completely lost whenever hearing about them in the media,” said Tsang, an associate professor of economics in the Virginia Tech College of Science. “I simply want to know what’s going on and what’s behind all those jargons. Combining my experience in economics research and Zichao’s programming skills, we gradually have a better sense of how the markets work.”

In basic terms, bitcoin is a digital currency that can be exchanged by anyone anywhere in the world via the Internet. Transactions are tracked on a blockchain - a seemingly unhackable computer code recorded by programmers or “miners." Only 21 million bitcoin will ever be created.

Bitcoin’s creators “wanted to make a global currency, a digital currency to replace the current system backed by government credit,” Yang said. “They wanted to replace it with currency backed up by technology to take back power from governments and give power to the public.”

Whoever “they” are is a mystery and part of the appeal for Yang. He has long been more interested in technology communities rather than economic theories. The fact that the bitcoin cryptocurrency emerged out of, in essence, a secret society attributed to the fictitious “Satoshi Nakamoto” fascinated him the moment he heard about it.

But what is certain is that what began as an experiment within a subset of the computer science community has emerged as a major investment opportunity, with more companies increasingly trying to figure out how to accept it as payment for goods.

Bitcoin’s rush began in late 2017. One plausible explanation, according to Yang, is that Chinese citizens who were restricted from converting a lot of yuan into foreign currencies began buying up bitcoin that they could then convert into something like U.S. dollars. Media began to take notice of bitcoin’s rise, which led to more publicity and more investors looking to cash in. 

“Now we have a second wave with the bitcoin price just going crazy in the past few months,” Yang said. “Institutional investors are now gaining confidence in this investment, which also drives up the price.”

Even small investors can now get in on the action by using online tools such as Cash App, PayPal, and Robinhood to acquire bitcoin. 

Economists are equally fascinated by the technology. “There is still much to learn given how quickly and dramatically the markets change,” Tsang said. “Working on cryptocurrencies is so different from working on other research topics. There is just so much data to play with.”

Yang’s latest research into bitcoin is actually the transaction fees that miners receive (in bitcoin, of course) for recording or confirming an exchange in the blockchain. Think when a credit card transaction occurs where a store pays a fixed percentage of a sale to VISA or MasterCard. 

“In bitcoin, it’s different,” Yang said. The purchaser pays the transaction fee depending on “how many miners are on the network at that moment and how many transactions need to be processed.” The higher the demand, the higher the fee. Speed can be at a premium given the wild swings in the bitcoin market.

Tsang added, “It is still a burgeoning field of study, and there so many directions to explore. Studying cryptocurrencies is as exciting as investing in them."

Despite his fascination, Yang said he’s actually not optimistic about bitcoin’s future. “Bitcoin doesn’t have unlimited supply, and then you’ll have deflation and money becomes more and more valuable,” he said. “I’m actually optimistic about cryptocurrency in general, but bitcoin will be a prototype of crypto. We’ll use bitcoin to find out where we can improve, so that in the future we’ll design a new cryptocurrency that will have the power to be a more global currency.”

Written by Michael Hemphill

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