Bitcoin Basics: A Beginner’s Guide to Cryptocurrency
The world is abuzz about bitcoin these days and that has many people wondering what bitcoin actually is, why it’s so hot right now, and what it all means for the future of ecommerce. The following article will hopefully help demystify this ultra-hot cryptocurrency.
What is bitcoin?
Bitcoin is a form of digital currency and a worldwide payment system. Unlike traditional currency, such as minted coins or printed bills, bitcoin is created and held electronically. And unlike traditional currency that is controlled by a central bank, no single entity controls bitcoin and, by extension, no single authority can manipulate the value or destabilize the network. Bitcoin is exchanged electronically by users via cryptographic addresses. Third-party sites, called exchanges, help facilitate these transactions.
Where does bitcoin come from?
The process by which bitcoins are generated is called mining. Using powerful computer processors, individual miners or groups working together essentially solve a complex mathematical problem, which not only uncovers new bitcoin, but also serves to maintain the security and integrity of all bitcoin transactions that take place on the network.
Specifically, transaction details resulting from the transfer of bitcoin around the world are collected into a list called a block. It’s up to miners to confirm those transactions and write them into a general ledger, which is essentially a long list of blocks, known as the blockchain. Anyone can access the blockchain to explore any transaction made between any bitcoin addresses, at any point on the network.
When a block of transactions is created, miners put it through a complicated process involving a hash algorithm and a nonce, which this blog from Coindesk describes in greater detail for those who are so inclined. In return for all their hard work maintaining blockchain, miners earn bitcoins for successfully completing each complex cryptographic hash. The mining process makes use of various checks and balances to ensure that the system’s data remains secure, as tampering with data effectively prevents the production of new bitcoins.
There is a finite number of bitcoins to be discovered — 21 million to be exact — and the process of mining inherently increases in difficulty over time as a way of limiting the number of bitcoins found each day. It is predicted that all 21 million bitcoins will be mined by 2140.
Who created bitcoin?
It only makes sense that a cryptocurrency’s origin story should be shrouded in mystery. The name Satoshi Nakamoto has been associated with its invention ever since the first digital paper on bitcoin emerged in 2008. But even now, almost 10 years later, we are no closer to knowing with certainty just who Satoshi Nakamoto is or whether bitcoin was actually the result of a team of people working together instead.
So far, Hal Finney, Dorian S. Nakamoto, Craig Wright, and Nick Szabo, among others, have been considered possible candidates. As an homage to bitcoin’s purported creator, a satoshi is the smallest divisible amount within one bitcoin, representing 0.00000001 bitcoin or one hundred millionth of a bitcoin.
What are the key features of bitcoin?
Given that bitcoin was created in large part to serve as an alternative to fractional-reserve banking , it’s not surprising that it differs in some pretty significant ways to traditional currency and payment systems. Here are a few of the key differences:
1. It’s decentralized
Individual users are in control of their bitcoin. There is no central authority that can manipulate or seize control of the bitcoin network.
2. Personal information is not traceable to transactions
This is both a pro and a con in that it protects users from things like identity theft, but it also led to bitcoin becoming a popular payment method for illicit black markets, such as the Silk Road, an online marketplace for illegal weapons and drugs.
3. Minimal transaction fees
Currently there are fairly low fees associated with bitcoin payments. Bitcoin exchanges may offer a variety of services whereby fees vary depending on the type of transaction, but generally speaking these fees tend to be lower than credit cards or PayPal.
4. Reduced risk for merchants
Since bitcoin transactions cannot be reversed, do not carry with them any personal information, and are secure, merchants are better protected from any losses that might occur from fraudulent credit card use.
5. It’s a true global currency
Bitcoin’s value is the same worldwide and it can be used in any country. No one country can overinflate the value or devalue it, for instance, by making more.
Should you invest in bitcoin?
Since its inception, Bitcoin has had its ups and downs, but nothing quite like what’s happening right now. At the time this article was written, one bitcoin was worth $25,000 CAD. But before you jump onto the bitcoin bandwagon, consider a few of the pros and cons of investing in bitcoin:
- Bitcoin is no longer just for computer geeks and libertarians. A growing number of mainstream investors and entrepreneurs now see bitcoin as a legitimate asset class, similar to stocks, bonds, or commodities.
- A finite supply of bitcoin could continue to drive value. It is thought that nearly 80% of all bitcoins have already been discovered and, as mentioned, no new ones will be available after 2140. In addition, some are predicting demand to increase particularly if central banks decide to start buying them as foreign currency reserves.
- Bitcoin’s uptake as a mainstream payment system has been slow (except among criminal entities). To date, there is still little evidence that bitcoin will replace cash or credit cards anytime soon. Transactions are relatively slow (10 minutes in some cases) and fees are steadily increasing.
- The bitcoin bubble could burst. Over the last decade, bitcoin has been volatile with some fairly dramatic crashes, notably in 2013 and 2015. Also, experts contend that this latest exponential price increase is unsustainable and once prices drop, many buyers will exit the market.
While it may be unclear precisely what the future has in store for bitcoin, it has, without question, been the driving force behind elevating cryptocurrency to the collective conscience. Whether you prefer to watch the bitcoin action from the sidelines or jump right into the fray, it will be fascinating to see how this journey unfolds.