Bitcoin is a form of currency, known as a cryptocurrency, which is similar to the former US “Gold Standard” currency, but operates like its own internet and is the world’s first free market, decentralized global currency. Bitcoins can be exchanged for other currencies, goods or services.Bitcoin should be thought of in layers since it offers much more than standard currencies.
Bitcoin is a peer-to-peer electronic cash system or “cryptocurrency” that doesn’t rely on trusting one central monetary authority and allows for anonymous, untrackable and untaxable transactions. The idea was first discussed by members of the cypherpunk mailing list and then a workable system – which used a distributed database spread across the nodes of a peer-to-peer network (a little like the one that underpins Bittorrent) that could keep track of transactions secured by cryptography – was outlined by a programmer called Satoshi Nakamoto in a paper in 2008 and built in 2009.
How do Bitcoins work?
Bitcoins are bit more different than a standard currency since it has its own built in transaction system through its mining process. If the dollar, gold and visa had a baby we’d call it Bitcoin.
Bitcoins operates on a open transaction ledger called the ‘Blockchain.’ All transaction data on the network is recorded on the blockchain. Each time a new block is mined the transaction data held inside that block is added to the blockchain and confirmed. The blockchain is then downloaded by every wallet making it irreversible. All information on the network is encrypted to create anonymity, but this still needs more improvement.
What is the blockchain?
The blockchain is the entire history of transactions made with a certain cryptocurrency. Because the blockchain is the technology behind every single cryptocurrency it’s critical for our understanding of cryptocurrencies. So let’s break that down.
Whenever two users of a cryptocurrency, say bitcoin, send coins to each other, a transaction is created. This transaction contains, among other details, the wallet address of the sender, the wallet address of the recipient, and the amount of currency sent.
These transactions are added to an unverified block, with each block containing the maximum of a pre-specified number of transactions, depending on the cryptocurrency in question. Once the transaction is added to a block it is said to be immutable: it cannot be edited and cannot be removed.
You can think of a block as a page of a ledger containing a list of transactions. Once the block is filled, miners will verify the transactions (more on mining later) and the block is ready to be attached to the chain.
Each mined block is then attached to the rest of the blocks in the blockchain. This chain of blocks contains every single transaction executed in the history of the cryptocurrency. The block is given a new identifier and also the previous block’s identifier. This attaches the block to the previous one in the chain and so on. Any one block can only be attached to one previous block and can only have one child block at any one time.
How are Bitcoins stored?
Bitcoins are stored on wallet which essentially serving as their own bank for the user. A wallet program is provided by the Bitcoin network which allows users to transfer bitcoin between one another. Wallets can be stored in a variety of ways:
- Online wallet provider
- CPU wallet
- Paper wallet
- Mobile wallet device
- Smartphone apps
- In your brain
Bitcoins are stored on the blockchain so they’re essentially like cloud money. Your accessing the rights to them when you exchange them through a wallet or service provider.
How do Bitcoins have a real world value?
As Bitcoins continue to be mined they begin to create more value since more and more people begin to own them. You can kind of think of them as trading cards or beanie babies. The longer you hold onto these things the more value they tend to take on as more and more people begin collecting them. The biggest difference is you can’t take your Babe Ruth rookie card to the car dealership and trade it for a car because it’s not a universal means of exchange like Bitcoins or a credit card. You have to go through the painstaking process of finding a buyer and turning that card into money. Bitcoin itself has consolidated that process.
People worked hard for months or years to mine these things, investing time, hardware, and energy in the process. This is where the initial value of the currency is born, since time and money was used to create them.
Put yourself in the shoes of a miner: you invest time, money and brainpower into mining these coins against thousands of other people around the planet. You’re not just going to give them all away for free. Everyone wants to get their money back from an investment, so people started exchanging Bitcoin for different things including currencies like the US dollar and the Euro. In return this allowed new people outside of the mining ring to collect and exchange Bitcoin, thus the currency began to grow which started to create a networking effect.
Now normal everyday people are exchanging cash for Bitcoins, wondering what the hell can I do with these things?
Why are people investing so much money into Bitcoin?
Because it’s like gold, or more accurately, the gold of the Internet. As long as people trust that this currency has value, people will continue to invest in Bitcoin. Bitcoin is open-source software, so it has no central control with corrupt bankers and politicians, just really smart people working for free to keeping it running.
Given all the problems we see in world economies, people are rapidly beginning to lose faith in conventional legal tenders like the EUR and USD. Governments have demonstrated that they can seize your bank-accessible assets if necessary. With Bitcoin, this is not possible as they have no access to your funds. Your Bitcoin wallet is essentially your own bank. It’s similar to the idea of people stuffing cash into their mattresses, except this is a lot more profitable and accessible. People will perhaps one day refer to this era as the gold rush of the 21st century.
Bitcoin or cryptocurrencies are not an easy thing to wrap your head around. Imagine trying to explain the internet to someone who lived in the 70′s, they might think they get it, but without actually experiencing it, they’d never truly understand. So dive in because this idea is spreading and I don’t believe cryptocurrencies like Bitcoin are going anywhere. I’m having a hard time wrapping my head around what the world may be like 5-10 years from now if cryptocurrencies really do take off, but I’m excited about the possibilities.
Whomever Satoshi Nakamoto is, they’re a freaking genius and a humanitarian in my opinion.