What's a Bitcoin?
Everything you need to know about Bitcoin and cryptocurrencies
|Jul 19, 2019||2|
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Unless you’ve been in a coma for the past ten years, you have at least heard the word Bitcoin before. Everyone knows something about Bitcoin, but almost no one has a good understanding of what exactly Bitcoin, blockchain, or cryptocurrencies are.
Let’s start with a basic explanation of what Bitcoin is. Bitcoin is a form of cryptocurrency just like the U.S. Dollar is a form of traditional currency. Theoretically, you can use cryptocurrency (crypto) to buy things online or in person, and use it for any transaction imaginable. In practice, many merchants do not accept cryptocurrencies due to their high volatility (unlike traditional currency, cryptocurrencies tend to be very volatile). You could buy a pizza with Bitcoin for the equivalent of $10, and by the time you got done eating the pizza the pizza shop might be left with $8.
New forms of cryptocurrency pop up almost every day; there are currently over 2500 known cryptocurrencies listed online. Many of them offer something unique, like being tied to the value of gold or backed by new technology. There are even joke cryptos connected to memes, like the Dogecoin. Safe to say there’s probably a cryptocurrency out there for everyone. Despite the small differences, all cryptocurrencies work basically the same way and everything written in this article can be applied to all forms of cryptocurrency, not just Bitcoin.
If Bitcoin is a currency, why does it go up and down so much? Due to their high volatility, many analysts note that cryptocurrencies behave more like stocks than currencies. Even the SEC is unsure how to classify cryptocurrencies; they believe that investors are putting their money into cryptocurrencies expecting them to behave more like securities, or stocks, and less like traditional currencies.
With all of the focus on cryptocurrencies, many have lost sight of the truly exciting technology behind crypto, blockchain. Blockchain is the record-keeping technology behind cryptocurrency. If you are happy with that explanation and don’t want to read a really nerdy explanation of blockchain, feel free to skip the next paragraph.
Any time a transaction with Bitcoin or other crypto occurs, it’s recorded in files called blocks. A block usually holds about 500 transactions. Whenever a new transaction is sent to a block on the blockchain, other computers on the chain must verify it before the transaction is completed. Think of this like the bank checking to make sure your signature looks right before cashing a check. Every computer connected to the blockchain network has the same copy of the blockchain, which means it would be almost impossible for hackers to manipulate cryptocurrency transactions. To do this, they would have to find a way to change the blockchain records on every computer connected to the network.
Why is there such a big Bitcoin craze? One of the reasons people are really excited about Bitcoin is because the blockchain technology behind cryptocurrency makes it potentially impossible to hack or manipulate, so it’s very secure. Cryptocurrencies are also exciting because they are just so futuristic and cool; who doesn’t want to own an unhackable internet coin of the future?
When I buy a Bitcoin, what do I actually get? Well, disappointingly, you actually get nothing. You don’t own a piece of a company, like you do with a stock. You don’t own any physical object, like you do with a bar of gold. You don’t even get a Bitcoin debit card; when you buy a Bitcoin (or fraction of a Bitcoin, since a whole Bitcoin would be over $10,000), that fraction of a coin goes in your digital wallet.
Remember when I said earlier how Bitcoin is unhackable and very secure? Well that’s true, but unfortunately humans are not unhackable. If someone were to gain access to your virtual wallet (by stealing your username and password, for example), they would be able to drain all of your cryptocurrency fairly easily. And since all transactions are anonymous and untraceable, once it’s gone it’s truly gone. Tracking down someone who stole your virtual currency would be next to impossible.
Despite being the internet coin of the future, not many people are using them as actual coin. Most of the hesitation to spend Bitcoin probably comes from the fear of being the next person to overpay for a Papa John’s pizza; the first Bitcoin transaction, recorded in May 2010, was an unlucky man from Florida who spent 10,000 BTC on two large Papa John’s pizzas. Today, that amount of Bitcoin is worth a little over $100 million. This is widely considered the worst trade deal in the history of trade deals, maybe ever.
While many people are hesitant to spend their Bitcoin, experts warn that Bitcoin needs to be spent to be taken seriously. This makes a great deal of sense – if cryptos want to be considered currencies then they need to be widely used and accepted for everyday transactions just like traditional currencies. Until Bitcoin and other cryptos are being regularly used for goods and services, it’s probably safe to consider them speculative, high-risk investments.
Now that you know the basics of cryptocurrency and Bitcoin, feel free to take your knowledge to the next level. A good place to start would be memorizing all 2500 cryptocurrencies known to man. Although by the time you read this, there will probably be 2600.
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