What’s All The Rage About Bitcoin?
How Bitcoin Works Under the Hood
A somewhat technical explanation of how Bitcoin works. Want more? Check out my new in-depth course on the latest in Bitcoin, Blockchain, and a survey of the ...
In the past year, the digital currency known as Bitcoin has been making all sorts of waves in financial news. Some claim that the currency is the best thing to ever happen to consumers, while detractors claim it’s just a big bubble.
So what exactly is Bitcoin? It’s a digital cryptocurrency, meaning that there is no central bank that issues it, and the entire currency is held and used online. The currency was founded in 2009 by Satoshi Nakamoto , and has increased in popularity for the past eight years.
Initially, it took some time for the currency to actually get a transaction. The first recorded transaction took place in 2010, with someone exchanging 10,000 Bitcoins for two pizzas. If that buyer had held those Bitcoins, they would be worth over $170 million (with Bitcoin valued at about $17,000 as of the time of this writing).
Since that time, the price of Bitcoin has gone up and down, though mostly up in the past year. It first hit $1,000 in 2013, but quickly fell back down to $300; it would take two years for it to reach $1,000 again. But now, the currency just hit a value of $20,000, but just recently fell down to about $17,000.
Some see this price fluctuation as a sign that it’s just a bubble, that the currency is overvalued and that anyone with money in Bitcoin should sell now. I think it’s too early to know for sure either way; time and market forces will reveal the truth either way. But one cannot deny the popularity of Bitcoin.
Bitcoin, unlike the U.S. dollar, or the British pound, or the euro, is not issued by a central banking authority. Its critics say that they don’t understand how something not issued by a central bank could be used as a currency; however, those who buy into it often do so exactly because of that. The currency’s value is determined by market forces instead of central banking boards, and that is exactly why it is so valuable to some people.
If you’re wondering how it all works, let me (try to) explain. When you sign up for Bitcoin, you have your own unique digital wallet. In that wallet is your own unique address (similar to bank account and routing numbers). However, each address is only used once per transaction, keeping the account details secure. The system is very decentralized, with no one entity controlling the value, and no other person being able to alter details of the transaction.
One may ask, how does it have a value, and how can users not simply “create” new Bitcoins to use over and over again? This is prevented by the public ledger component of Bitcoin, where every transaction is recorded online, and all users can see those transactions and verify that the Bitcoins are not simply being “regenerated” or “created” at random.
Bitcoins themselves are generated through a process called mining. Only 21 million Bitcoins will ever be mined, so there is a limited quantity available. The idea is that the currency cannot be inflated by continuously printing new money the way that central banks have often done.
Mining is a tricky and complicated process, though, so don’t think that you can just go and “make” new Bitcoins just like that. It takes a lot of time and some investment in equipment to do it (as the video above explains).
So why are people buying Bitcoin? Why does it have value? Why will it continue to have value?
Bitcoin has value because people have faith that other people will accept it as a means of exchange. It literally is that simple. Just like dollars or pounds or euros, those currencies are just notes that indicate a value, but the actual value of the currency is the level of trust that people on the market have in it.
U.S. dollars have value on the market. Confederate dollars, on the other hand, have no market value because no one accepts them as currency. They’ll have some value as historical collector’s items, but not as currency. Why? Because no one believes that it has value.
More people are beginning to buy the currency because they see it as a more secure transaction than credit or debit cards, and they want to move away from their government’s cash currency because they either don’t trust it, or it has so little value due to inflation.
Indeed, Bitcoin is one of the few things that is keeping some people alive in Venezuela, as one anonymous author wrote for the Foundation for Economic Education. While the Bolivar plummets in value, and the socialist government runs the country into the ground, many Venezuelans are flocking to Bitcoin to have any sort of currency to buy life’s essentials.
Will Bitcoin continue to see more users flocking to it? I certainly think so. Will there be issues that arise along the way? Certainly, nothing is without problems in our fallen world.
However, this alternative means of exchange gives people all around the world the opportunity to conduct secure transactions, even keep their families alive in places where government policies are destroying the economy.
Do you have any experience with Bitcoin? Are you interested in learning more about it? Share your thoughts with me below!