We've all heard of it. It's a topic of discussion everywhere, especially on the internet. But what is Bitcoin, really?
For the record, Bitcoin was invented in 2009 by an individual (or group) calling themselves Satoshi Nakamoto. His goal was to create a “new electronic cash system” that was “completely decentralized, with no server or central authority.” After cultivating the concept and technology in 2011, Nakamoto outsourced the source code and domains to others in the Bitcoin community and then disappeared.
What is Bitcoin?
Simply put, Bitcoin is a digital currency. There are no printed bills or physical coins. It is decentralized – there is no government, institution (like banks) or other authority that controls it. Owners are anonymous. Instead of using names, tax IDs or social security numbers, this digital currency connects buyers and sellers through encryption keys. And it is not issued like a traditional currency. Instead, Bitcoin is “mined” by powerful computers connected to the internet.
How is mining done?
A person (or group, or company) mines Bitcoin, using a combination of advanced mathematics and record-keeping. When someone sends a Bitcoin to someone else, the network records that transaction and all others over a certain period of time in a “block.” Computers running special software – “miners” – record these transactions in a giant digital ledger. These blocks are known, collectively, as the “blockchain” – an eternal, openly accessible record of all transactions that have ever taken place.
Using specialized software and increasingly powerful hardware, miners convert these blocks into sequences of code, known as “hashes.” Producing a hash requires serious computing power, and thousands of miners compete simultaneously to do it. It’s like thousands of chefs racing to prepare a new, extremely complex dish—and only the first one to serve a perfect version of it ends up getting paid.
When a new hash is created, it is placed at the end of the blockchain, which is then updated and publicly distributed. For his or her effort, the miner receives 12.5 Bitcoins – the value of which, as of December 2017, is more than $225,000. Note that the amount of Bitcoins awarded decreases over time.
What determines the value of a Bitcoin?
The value of a Bitcoin is determined by how much people are willing to pay for it. In this way, there is a similarity to how prices are assessed. The protocol set out by Satoshi Nakamoto dictates that only 21 million bitcoins can be mined – around 12 million have been mined so far – so there is a limited supply, like with gold and other precious metals, but there is no real intrinsic value.
How can I buy Bitcoin?
If you're willing to take the risk associated with owning Bitcoin, there are a growing number of digital exchanges like Coinmama, CEX, Kraken, and Coinbase – the largest and most established of these – where you can buy, sell, and store Bitcoins.
Getting started is about as complicated as creating a Paypal. With Coinbase, for example, you can use your bank (or Paypal account) to make a deposit into a virtual wallet of your choice. Once your account is funded, which usually takes a few days, you can then exchange your traditional currency for Bitcoin.
What can I do with Bitcoin?
You can use Bitcoin to buy things from over 100,000 merchants, though few are well-known. You can sell it. Or you can just store it. Note that there are no inherent transaction fees with Bitcoin, although exchanges like Coinbase typically charge a fee when you buy or sell.
Is all this legal?
The answer is yes, for now and as long as – as with any currency – you don't do illegal things with it.
What are the risks?
There are several risks associated with Bitcoin. First, the financial value of a Bitcoin is extremely volatile and can fluctuate widely from day to day or even hour to hour. Bitcoin transactions cannot be traced individually – they are secured and hidden through the use of public and private encryption keys. This anonymity can be attractive, especially as companies and merchants increasingly monitor our purchases, but it also has its drawbacks. You can never be sure who is selling or buying your Bitcoin. Theft is also a risk.
Are there other cryptocurrencies?
Yes. More than a thousand, with new ones being created every day. In addition to Bitcoin, which is the ancestor of them all, other well-known altcoins include Ethereum, Ripple, and Litecoin.
