The Newbie's Guide to Bitcoin
You have probably heard about Bitcoin on the news – after all, it's all over the place, and it's considered possibly the most disruptive technology of this decade. What makes Bitcoin so unique is that it is the first popular cryptocurrency; that is, a currency that uses cryptography techniques to function.
There is a lot of jargon in the media and elsewhere, and it can be somewhat difficult to follow exactly what is going on at times. The truth is, Bitcoin is a complicated technology, but this article will break it down into easy-to-digest components so that you’ll have a better understanding of what it is.
The Basics of Bitcoin
Bitcoin was invented by Satoshi Nakamoto in 2008, although this is generally considered to be a pseudonym for an individual or a group of people who collaboratively created the Bitcoin system. Essentially, the system works by having a public ledger that records all transactions throughout the network. The specific units (currency) of this network are called bitcoins.
The public ledger is called the “blockchain,” which is basically just a big list of who has made transactions and how large those transactions are. No central authority (such as a central bank) maintains the blockchain. Rather, it is distributed across a network of machines, all of which must agree on the validity of the transactions that have taken place.
And as you can imagine, banks are usually not huge fans of this system, as this challenges their previously-unquestioned monopoly and profits in the money-handling industry. But some are already seeing the benefits of the blockchain; they will be the future leaders of the banking industry.
I should point out that the technology is called Bitcoin and the currency is bitcoin. We have digitized the dollar and given it access to the blockchain.
How Do Transactions Work?
Ownership of bitcoins is determined through the use of public/private key cryptography. In order to verify that a particular transaction came from a particular individual, that individual must sign the transaction with the private key (which is not visible to the network) and the public key (this is called a Bitcoin address). This system has some issues, of course: If a private key is lost, then the bitcoins to which it refers are also lost. Forever.
How Are Bitcoins “Minted”?
Unlike paper currency, you cannot simply print bitcoins. Instead, a process called “mining” allows new coins to be added to the network. Miners are machines that verify transactions on the network. There are a lot of technical details involved here, but essentially the network makes it more and more difficult for miners to solve the math problems that allow transactions to be verified, thus controlling the flow of new bitcoins into the system.
In fact, only a certain maximum number can ever be created… 21 million. That’s the main factor that is expected to make the price skyrocket one day. When there’s only a finite number of an item, its price escalates, but I'm taking that report with a grain of salt. Specialized exchanges also exist to provide currency trades from bitcoins to USD and vice versa. And other countries’ fiat may be used also.
How Do We Store Bitcoins?
Although you technically do not “store” bitcoins, you do use special software known as Bitcoin wallets to store the private keys (ownership credential) and public keys (addresses) of your coins. Since the most basic wallets simply store collections of keys, some individuals use physical paper to store the keys by printing out the QR code or bar code representation of them. This is a bit more secure than a wallet. “Cold storage” is when you take your wallet (computer) completely offline, and this is the most secure way of storing your coins since it's not susceptible to computer hacking.
As I stated at the beginning, this is a complicated technology, to say the least. But it all makes sense once you see the big picture. Take some time to learn more about Bitcoin and see how you can use it for profit and fun.