Digital cryptocurrency basics: what’s a Bitcoin?

What is Bitcoin really? Digital cryptocurrency isn’t cryptic or mysterious in any way (although they might seem so because they’re still so new); ‘crypto’ refers to how the currency is  secured which is through cryptography, or codes.

 

So if fiat money (regular paper money) was originally based on gold, you could say that digital cryptocurrency is based on math. Whereas governments today issue money by printing it, Bitcoin is issued via a method called ‘mining’ which essentially involves completing a set of math tasks. ‘Miners’, people who ‘mine’ or produce Bitcoin, earn them in exchange for their work to produce them and this is how Bitcoin supply is distributed without a centralized authority managing the process.

from cows to cryptocurrency

Can I mine Bitcoin?

Well the math work that miners do in order to earn Bitcoin is no secret, it’s all open source information that can be downloaded by anyone. So why isn’t everyone mining Bitcoin you ask? The amount of computer processing power it takes to  successfully mine is immense. So immense that Bitcoin miners who already have powerful machines often work together to group their machines together into ‘nodes’ in order create create a more powerful super machine.  In addition, as more people mine the amount you can earn naturally starts to decrease. Even with a somewhat powerful computer, earning potential could be in the hundreths, or even thousandths of one Bitcoin so it’s not as easy as it sounds.

 

What’s Bitcoin worth?

Here’s the current price of Bitcoin here.

 

 

The Bitcoin protocol specifies that there can only ever be 21 million bitcoins in total. No one is 100% why Satoshi Nakamoto, Bitcoin’s mysterious creator, chose the number is 21 (although there are some theories) but the original idea was to create a currency that would be deflationary so limiting the amount that could be produced would be a way to do this. As of this writing there are almost 15.7 million Bitcoins in circulation, you can check Blockchain.info for the most up-to-date numbers.

 

One Bitcoin can be divided down to 8 decimal places (which looks like this: 0.00000001) and this smallest amount is called a ‘Satoshi’, named after Bitcoin’s creator. Since Bitcoin is not a centralized currency the names of the other denominations are somewhat up for discussion and if you’re interested you can follow one of them here on bitcointalk.org.

 

The best way to understand Bitcoin is in relationship to how we understand the kind of money most of us are still using day-to-day.

 

 

How is a digital cryptocurrency like Bitcoin different from regular money?

Feature Details Pro Con
Decentralized Probably its most defining feature, Bitcoin is completely decentralized so there’s no issuing or governing body like the Federal Reserve for example. Being decentralized also means that there is no one single point of failure. And no bank and seize your money or manipulate its price. Anyone can setup a bitcoin address and send and receive bitcoin anytime form anywhere since it’s all digital. You can buy Bitcoin anytime from anywhere and move them around freely anonymously. If you ever loose the private key to your bitcoins there’s no one to help you find them.
Distributed Since Bitcoin is digital, there’s no central bank or central location that stores it for you and the value is determined 100% by the the market (aka supply and demand). If you’re concerned about the rate of inflation or don’t feel like your money is safe in a bank, Bitcoin can help hedge against these risks. The value of Bitcoin is not guaranteed by a central authority which brings with it inherent risks.
Secure The Bitcoin protocol is secure and uses a type of transaction verification system called the ‘blockchain’, similar to a bank’s ledger. However with Bitcoin there’s only one ledger and the ledger is completely public. If you want to receive or make or accept payments with fewer transaction fees (and paperwork) than credit cards and bank wire transfers Just as you need use strong passwords for any other type of online account, it’s up to you to do the same to secure your Bitcoin wallet.
Anonymous To mine, buy or trade Bitcoin all you need is a Bitcoin ‘wallet’ which is basically a digital location to store your Bitcoin.  A wallet will have 2 addresses, or keys.  One is the wallet public key that you can be share with other people so they can send you Bitcoin. The other is a private key that’s like a password, only you know it and use it to send Bitcoin to someone. A key is composed of a string of letters and numbers – no names, addresses or other personally identifiable information. Transactions on the Blockchain record only a transaction ID and the number of Bitcoin exchanged in the transaction. If you want to receive or make or accept payments with fewer transaction fees (and paperwork) than credit cards and bank wire transfers etc., Bitcoin could be right for you. If you buy something and don’t get what you expected there’s no way to track down the seller. Beware in general and make sure you know who you’re dealing with.
Transparent Because all transactions (not names) are recorded and viewable by anyone on the Blockchain, anytime a new transaction is made it’s cross-checked against the Blockchain to make sure it wasn’t used before. This makes it impossible to counterfeit or double spend Bitcoin. Bitcoin has the security features in place that could potentially make it a strong candidate to become the digital currency of choice for the future. As mentioned before, even though everyone can see everyone else’s transactions you won’t know the individual they’re attached to so use caution.

 

Where can you buy Bitcoin?

The easiest way to buy Bitcoin is through an exchange which is like a brokerage. You sign-up for an account (you won’t be anonymous when using an exchange, the exchange will know who you are) and connect your real bank account info or credit card and then purchase Bitcoin this way. You can hold your Bitcoin in your exchange’s wallet or you can move it to a Bitcoin wallet.

 

Coinbase is a popular and reputable one that’s really more like a comprehensive digital wallet that can be used to store, spend, buy an store Bitcoins and only charges a 1% fee but all Bitcoin-to-Bitcoin transactions are of course, free). There are many others exchanges, you can check out the latest list on Wikipedia here.

 

You might be asking yourself, “but if Bitcoin is supposed to be decentralized but if I buy it from an exchange like Coinbase, doesn’t that mean Bitcoin is actually centralized?” Good question, but the answer is No. The difference according to Erik Voorhees who explains in this article, requires and understanding of the difference between ‘coercive centralization and market-based centralization. Bitcoin possesses the latter, but avoids the former, and that is a crucial distinction.’ To put it simply, no one has to use Coinbase (or any of the other exchanges) in order to buy, sell or trade Bitcoin. This ability to ‘opt out’, or not use a centralized service (e.g. like a bank) is what makes Bitcoin decentralized.

 

What can you buy with Bitcoin?

While it still remains to be seen if a digital cryptocurrency like Bitcoin will really be the currency of the future, there are more and more places accepting Bitcoin as a form of payment. Here are some places that you might not have known accept Bitcoin:

 

  • Amazon – you can’t shop and pay directly with Bitcoins but you can use Bitcoins to buy Amazon gift cards (and then pay for your stuff with the gift card).
  • Gyft – is a digital giftcard platform where you can buy gift cards using Bitcoin for hundreds of retailers like Amazon, Target, BestBuy and Home Depot.
  • CheapAir.com – book a flight or hotel (or both!) on CheapAir.com with Bitcoin.
  • Dish Network – the cable TV provider started accepting Bitcoins in 2014.
  • Etsy – there are almost 700 sellers on Etsy who accept Bitcoin.
  • Simon Fraser University – SFU is the first post-secondary institution in Canada to accept Bitcoin for textbooks
  • Namecheap – the first domain name registrar and hosting company to accept Bitcoin payments.
  • Bitcoin.com store – naturally you can buy various ‘Bitcoin-wear’ and accessories on the Bitcoin.com store from T-shirt to Bitcoin soap.

 

 

Are digital cryptocurrencies right for you? Where can you buy Bitcoin?

 

Whether or not you ‘invest’ in buying Bitcoin or any of the other lesser known cryptocurrencies will likely depend on your attitudes on the future, the state of technology and of course your faith in a decentralized currency. Regardless of how you see things now, there are a significant number of resources available to learn more.

 

Here are links to some great resources that provide a great overview/intro to Bitcoin:

If you’re still confused about what the Blockchain is, here are some great references:

 

Other Stuff:

Check out this Podcast from Tim Ferris, ‘The Quiet Master of Cryptocurrency’ with guest Nick Szabo (and Naval Ravikant too!)  A must listen.

COOL –> A visual demo of blockchain technology in action, the blockchaindemo.io will guide you through each component of a blockchain step-by-step.