Every time you read the news there seems to be something new happening in the world of Bitcoin. Whether it be the collapse of Mt.Gox or Warren Buffett warning investors to “stay away” from the new currency, you just can’t avoid hearing about it. Also, Bitcoins massive surge in value has also helped propel it into mainstream news headlines the world over.
Bitcoin Price Index Chart – July 2010 to May 2014
So, what is Bitcoin, anyhow? To help you understand the basics we’ve broken it down into its simplest terms. Somebody once said that you don’t know a subject unless you can explain it to a six-year-old. That will be the objective of this article.
Alright, get ready, you’re about to know more about this mysterious currency than all of your uninformed friends. By the way, this is not to serve as the definitive guide to Bitcoin, there are plenty of those already online. Let’s get to it!
What is Bitcoin nonsense?
Bitcoin is a peer-to-peer online virtual currency, like the electronic currency that’s been used in video games and mobile web apps for years. Bitcoin is also the first decentralized electronic currency, meaning that it is not controlled by a single authority such as The Federal Reserve or Bank of England.
Bitcoin is designed around the idea of using cryptography to control the creation and transfer of money rather than relying on a central authority.
There is also a finite number of Bitcoins that will ever be produced (mined) set at 21 million. Theoretically, since there is a limited number that will ever exist, its value should continue to increase over time. All of Bitcoins transactions are recorded and secured by cryptography.
How does it work?
Bitcoin is based on a large set of data that represents every Bitcoin transaction called a block chain. All purchases are recorded in the block chain, confirming an owner’s possession of Bitcoins. Every user must download a digital Bitcoin wallet where their Bitcoins are stored. Essentially you are downloading the block chain, so every user who has a wallet has a copy of the entire network. Once you’ve downloaded a Bitcoin wallet, you are assigned an address where you are free to receive Bitcoins.
How are Bitcoins created?
There is a formula so sophisticated that when it is solved (using computer processing power), it creates a “block” of data which contains Bitcoins. The genius of Bitcoin is that diminishing returns is built into the system. The rate of block creation is set to remain constant over time: six per hour. Anyone can install the mining software, which uses the computer’s processing power to carry out intensive calculations – Try to think of it like trying to search for prime numbers.
The number of Bitcoins generated per block is set to decrease geometrically over time, ending in 2040 with 21 million Bitcoins. Bitcoins follow a pre-defined schedule of how quickly they will be released ending in 2040. Every four years there’s a 50% reduction in the number of Bitcoins released per block. At first the blocks were easier to discover, and have continued to increase in difficulty over the years, such as in the case with finding prime numbers.
This algorithm was chosen because it’s similar to the rate at which commodities like gold are mined. There may be many people working on the same piece of code.The aim is to find a certain sequence of data, the “block”, that produces a particular pattern when the algorithm is applied to the data. Whoever’s computer manages to do that will be awarded the bitcoins.
Should I start mining my own Bitcoins now?
No, you’re too late. The computing power and energy costs would render your efforts futile, so don’t waste your time. Maybe if you had started a few years ago, it would have been worth it. But, on the brightside, you’re still free to speculate in the market, so go purchase some Bitcoins, if you want.
How can I purchase Bitcoins?
There are a number of ways to purchase Bitcoins. Usually, this is done through a currency exchange. The exchange matches up two interested parties and arranges the transaction.
Coinbase is a great option. They’ve raised 31 million in funding from top investors and take security seriously.
“I heard Bitcoin is only used by strange people looking to buy illegal weapons and large quantities of drugs on the internet, is that true?”
Yes, Bitcoin is very useful if you want to buy drugs and other illegal items without easily being identified. Since Bitcoin transactions are almost impossible to trace and harder to tax, they are the currency of choice for those looking to engage in nefarious activities. It’s unavoidable, but companies such as Coinbase are working incredibly hard to combat this image and show that Bitcoin is a legitimate currency. Also, Silk Road, the online black market of choice for many Bitcoin users was recently shut down by the FBI (even though rumors are saying that it opened again). However, there are a number of legitimate sites that accept Bitcoin, like Overstock.com, Virgin Galactic and WordPress. Bitcoin was also recently accepted by a Lamborghini dealership in Newport Beach, CA.
So, it’s true I can by drugs and guns?!
Please, stop asking that question.
Who invented the Bitcoin?
Bitcoin was first described in a 2009 paper published by some guy named Satoshi Nakamoto. The paper was entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”. This was the basis for the bitcoin network. The formulation of an online virtual cryptocurrency with a hash-based proof-of-work distributed network was explained. Nobody knows much about this guy and he stays out of the public eye. Recently there has been a lot media surrounding a guy believed to be Nakamoto, but he denies being the creator.
So there you have it. Still confused? Great!
Do you think that Bitcoin is here to stay? I’d like to hear your thoughts! Sound off in the comments section.