Bitcoin has unquestionably taken the world by storm, but how does it work? From Bitcoin mining to its unknown origins, this article explains ten basics about the cryptocurrency.
1. Bitcoin Is Money
Like any other currency, Bitcoin can be used to buy and sell goods and services. A 2020 HSB study found that 36 percent of small and medium-sized businesses accept Bitcoin or other cryptocurrencies as payment. Household names such as Microsoft, Home Depot, and Whole Foods all accept Bitcoin as a payment method. Unlike cash or credit cards, Bitcoin only exists on the internet; there is no physical representation of the currency. In order to use the currency, customers simply transfer the amount of Bitcoin they want using a virtual wallet on their phone or computer. By linking their online Bitcoin wallets to their browser of choice, consumers complete payment by clicking the pay-by-Bitcoin option and submitting the order. Bitcoin’s value is not determined by economic policy or inflation rates of a particular country’s currency, but rather by the supply and demand for the currency, costs involved in the mining process (we’ll get to that later), the prevalence of competing currencies, and the number of international exchanges on which the currency is listed.
2. Its Origins Are Murky
Bitcoin was established in 2009 on the heels of the international financial crisis, but its origins are not very clear. In October 2008, a paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published by a person named Satoshi Nakamoto. The true identity of Nakamoto has never been revealed, and in 2011 Nakamoto sent an email to Bitcoin developer Mike Hearn saying, “I’ve moved onto other things,” implying that his work with the currency was through. The anonymous identity of the currency’s founder underscores the idea that Bitcoin is a collective currency that can belong to anyone who has an internet connection.
3. Supplies Are Limited
There will only ever be 21 million bitcoins available, a limit set by Nakamoto. This is quite different from currencies such as the American dollar that have no finite limit, which can be a cause for inflation and loss of value. The scarcity of Bitcoin is meant to help to stabilize the value of the currency for the long term. Today, there are around 18.63 million bitcoins in circulation, meaning that there are only about 2.37 million still to be created.
4. Bitcoin Runs on Blockchain
In simplest terms, the Bitcoin blockchain is a digital ledger that keeps track of all Bitcoin transactions. Each block, or page, of this digital ledger records new Bitcoin transactions. In order for a new transaction to occur, new blocks must be added to the blockchain. Other cryptocurrencies operate on this same blockchain system with different features and conditions. Since the Bitcoin blockchain is essentially a public record of all transactions, someone with the proper knowledge could see what every person in the world does with their Bitcoin.
5. Bitcoin is Secure
Even though Bitcoin is built on open-source code, it has never been hacked and is considered incredibly secure because of the way the blockchain process encrypts transactions. Since the currency does not exist physically, Bitcoin can’t be stolen from banks, vaults, or mattresses. And because Bitcoin is decentralized – that is, the data exists simultaneously on thousands of computers across the globe – there is no single location that stores money like a bank does. Even though all Bitcoin transactions are public, the people making the transactions are anonymous.
6. Bitcoin is Borderless
Anyone with stable internet can use the currency regardless of where they live. Unlike the American dollar, which is created and distributed by the U.S. Treasury Department, Bitcoin is a decentralized currency. Bitcoin’s ability to be sent and received anywhere in the world has made it a serious resource for political activists. Due to financial sanctions imposed by the Russian government, opposition leader Alexei Navalny has raised over 658 Bitcoin (over $31 million at current rates) over the past five years to help fund his efforts to challenge Vladimir Putin. In Belarus, activists turned to Bitcoin after the de-facto dictator Aleksandr Lukashenko ordered money that was being used to help support victims of police violence to be seized from bank accounts. Activists fighting the Chinese government’s political censorship of Hong Kong have long relied upon Bitcoin to keep their finances out of Beijing’s hands. When activists need to send or receive funds securely, Bitcoin has increasingly become the answer.
7. Mining Can Be Lucrative – and Costly
All Bitcoin transactions are verified and added to the blockchain through a process called mining. Although this process is in no way similar to mining as most know it, it can be as financially rewarding as mining any precious metal or stone; for every block added to the blockchain, the miner receives a reward in the form of freshly minted Bitcoin.
The process of mining consists of being the first person to verify a block of transactions by solving a highly complex math problem called proof of work, which can only be cracked using specialized and advanced computer hardware. Mining is extremely costly, mostly due to the hardware and energy costs required to carry it out. It is estimated that the Bitcoin mining network uses 120 gigawatts per second. The amount of energy used in one second of Bitcoin mining could power 13.2 billion LED light bulbs, around 50,000 windmills, or 156 million horses. In 2018, the U.S. Senate Committee on Energy and Natural Resources estimated that Bitcoin mining used up about 1 percent of the world’s energy. As the circulation of Bitcoin increases, mining becomes more difficult and consumes more energy. To mine, you need lots of super-computing hardware, space to store your equipment, and a firm understanding of how the process works.
8. Bitcoin Is Becoming Mainstream
Bitcoin investors are not just tech-savvy young people who think that they can get rich quick off of its unprecedented rise in value. Some of the biggest names in finance and tech have invested heavily in Bitcoin, increasing its institutional reputation. Tech billionaire Elon Musk is vocal supporter and investor of Bitcoin, with his electric car company Tesla buying more than $1.5 billion of the digital currency. Billionaire philanthropist and Microsoft co-founder Bill Gates has voiced past reservations about Bitcoin; however, he is currently one of the high-profile investors in the currency. Aside from these celebrity investors, Bitcoin also has some serious institutional investors such as investment banks, hedge funds, and even university endowments.
9. It Isn’t the Only Player
Bitcoin is just the tip of the iceberg when it comes to cryptocurrencies and decentralized finance. Just as steam powered engines marked the beginning of the industrial revolution and computers led the internet revolution, Bitcoin may someday be seen as the jump-starter of the cryptocurrency revolution. There are more than 4,000 cryptocurrencies out there hoping to be the next Bitcoin. These currencies have different purposes, with some such as Monero and Zcash developing a completely private currency and others like Pax Gold creating a form of digitized gold that is backed by real gold bars. Researchers have speculated about whether banking institutions could become obsolete if Bitcoin or other digital currencies become preeminent.
10. Bitcoin’s Value Is at an All-Time High
As of this writing, the value of one bitcoin hovers around $50,000 with a market capitalization (the total value of bitcoins in circulation) of nearly $900 billion. For reference, Berkshire Hathaway’s market cap is around $520 billion, Walmart’s is around $393 billion, and Facebook’s is around $768 billion. Bitcoin’s value is highly volatile, making it a risky bet for investors. Some of this volatility is due to the potential for regulation on the currency, the public’s view of its legitimacy, and the increase of other competing cryptocurrencies. Clearly, Bitcoin has established itself on the financial stage; however, only the future will tell if the currency will stick around.
Featured image: Igor Batrakov / Shutterstock
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