With all the fracas going on in the past few weeks, it’s likely you’ve at least heard a passing mention of the Bitcoin phenomenon. When Bitcoin futures went live, the investment world went abuzz, and with the price of Bitcoin rising dramatically in the past few months, general interest in the Bitcoin has crept ever-higher. With that in mind, we’d like to dive into some basics, history, and other pertinent details for those who might want to bolster their Bitcoin knowledge and educate themselves on what is currently the world’s most well-known cryptocurrency.
Much of the most elementary information about Bitcoin can be found directly from the Bitcoin.org FAQ. While we won’t rehash every bit of information here, we would like to dive into some of the more important points and explore them with slightly greater detail. For instance, What it is and how it works. Here’s a short explanation, taken directly from the Bitcoin.org FAQ:
“Bitcoin is a consensus network that enables a new payment system and a completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen.”
While succinct, that answer still leaves a bit to be desired by those completely unfamiliar with the concept. To cut through some of the confusion, you’ll first have to get an idea of the technology behind it, a network commonly referred to as a blockchain:
“Blockchain…is basically an online ledger that keeps a secure record of each transaction all in one place. Every time anyone buys or sells bitcoin, the swap gets logged. Several hundred of these back-and-forths make up a block.”
The advantage here is that these blocks are decentralized across all the devices that have Bitcoin wallets, which, in theory, makes it quicker, cheaper, and more reliable as a form of payment. Coindesk breaks the concept down with an easy to understand analogy, highlighting the fact that the decentralized ledger keeps the system honest:
“You can’t cheat it. I can’t send you digital apples [Bitcoin] I don’t have, because then it wouldn’t sync up with everybody else in the system. It’d be a tough system to beat. Especially if it got really big. Plus, it’s not controlled by one person, so I know there’s no one that can just decide to give himself more digital apples. The rules of the system were already defined at the beginning.”
Another one of those founding rules of the Bitcoin system is that there’s a finite amount: 21 million. As the years roll on, the number of Bitcoin released drops (it cuts in half every four years), and those “mining” Bitcoin receive a diminished reward for doing so. Because of this, the number of discoverable Bitcoin (and total Bitcoin in circulation) will eventually cease growing. This helps guard Bitcoin against inflation, but also raises the question, how do people access gain access to those new Bitcoin in the first place?
The process is known as Bitcoin Mining. There’s some complex math that goes on behind the scenes, but Mother Jones provides a comprehensible, if simplified, explanation, by way of financial attorney Reuben Grinberg:
“Grinberg compares it to finding the missing piece of a puzzle. Whomever finds the puzzle piece wins a certain number of Bitcoins, and the process starts all over again. Finding the Bitcoin solution involves an incredible amount of processing power, and so users often band together in “pools” in order to find the solution and to earn Bitcoins more regularly.”
This system, which incorporates blockchain, prevent individuals from scamming by way of attempting to modify blocks, since that would invalidate subsequent blocks. It also creates a “competitive lottery that prevents any individual from easily adding new blocks consecutively in the blockchain.” In short, individuals have to play by the rules of the system, else they’re unable to mine any Bitcoin at all.
As for transactions of Bitcoin between different Bitcoin wallet holders, these are all included in the blockchain as well. Each Bitcoin wallet has a “secret” piece of data, referred to as a private key, that enable wallet holders to spend their Bitcoin through a cryptographic signature. They provide a kind of “mathematical proof” of a transaction, adding the wallet holder’s signature to an exchange and preventing others from altering said exchanges once the signature has been issued.