Image via Getty/Christian Ohde
Dollars. Pesos. Yen. Euros. Rupees. These currencies vary based on country of origin and value, but they have common factors: They are all centralized and exist in the physical world, in the forms of notes and coins. Fairly simple to understand.
Then there’s bitcoin: a cryptocurrency powered by blockchain technology that is far less easy to comprehend. Its claim to fame is that it is the world’s first decentralized digital currency—this means it functions without the oversight of a government, central bank, or administrator of any kind. Advocates believe it has the potential to revolutionize the financial industry and skeptics see it as nothing more than a fleeting fad.
Created in 2009, the currency received mainstream recognition in 2017 when the price of bitcoin skyrocketed. Since then, bitcoin earned itself notoriety for its volatile value—spikes and crashes in the world of cryptocurrency are the norm—and the fluctuating bitcoin valuation has had unique outcomes.
Rapper 50 Cent reportedly made $8 million in bitcoin after he let consumers purchase his album Animal Ambition back in 2014 using the currency, though he later denied the claims when filing for bankruptcy. Athletic wear, juice, and e-cigarette companies have rebranded themselves to cash in on the hype. In some cases, it’s worked: Long Island Iced Tea company’s stock rose 500 percent in a day after announcing they would be transitioning into a bitcoin company. Further legitimizing the currency is Forbes’ release of the first-ever “The Richest People In Cryptocurrency” list.
While anyone can purchase bitcoin, and there’s been a sharp spike in interest for investing in Bitcoin, there’s definitely a disproportionate breakdown in ownership. One report states that roughly 95 percent of bitcoin is owned by a little over four percent of people who own the cryptocurrency.
The temptation to dive into the Bitcoin market is real, but before you do, it’s important to know what it is and how it works. Here’s everything you need to know about bitcoin.
What is it?
Bitcoin is made up of a digital unit of currency (often designated as “bitcoin”) and an open source, peer-to-peer trading/payment protocol/network (referred to as “Bitcoin”), which is used to exchange the units. Bitcoin is similar to other forms of currency—the U.S. dollar, the euro, the yen—in that it can be used to purchase certain goods and it possesses a market price. At the time of publishing, one Bitcoin is worth $6,751.
However, the difference between regular, flat currencies and bitcoin is that bitcoin is not regulated by governments or controlled by banks. People trade bitcoins with other people, without the assistance of a third party like Paypal or MasterCard, and the market prices for bitcoins are determined by exchange websites. The price has been known to fluctuate greatly over the years, and the volatility has spiked tremendously in the past year.
Who created it?
Bitcoin was created in 2009 by a mysterious programmer known by the alias Satoshi Nakamoto. No one knows for sure who Nakamoto is, or even if they are one person—some believe it could be a collective of programmers. Nakamoto was a frequent contributor to cryptography forums and often wrote about the idea of a decentralized digital currency. A paper titled “Bitcoin – A Peer to Peer Electronic Cash System” was supposedly shared by Nakamoto to a mailing list discussion on cryptography dating back to 2008.
How are they created?
Bitcoins are created through a process called "mining.” People mine bitcoins by having their computers solve complex math puzzles, which requires a great deal of electricity and powerful computing chips. However, even if you have the right equipment, you can’t simply create endless bitcoins. There is a finite number of them: Nakamoto placed a cap of 21 million bitcoins, so there will never be more than that in existence. As of January 2018, 80 percent of all bitcoins had been mined.
So, how and where can I get some?
Similar to online marketplaces, you can buy bitcoins directly from other people. You can also use digital exchange websites like Coinbase, Bitstamp, Bitfinex, Kraken, and Gatehub. An exchange website is exactly what it sounds like: It's a website where people who have bitcoins can exchange them for other currencies, like dollars. All you need to do is set up an account with a payment company that allows you to deposit money that will then get credited on the exchange site. Once that's done, you can go on the exchange site and purchase as many bitcoins as your bank account allows.
How do I use them?
Bitcoins are stored in a digital “wallet,” which serves as a virtual bank account where you can send or receive bitcoins, save your currency, or pay for purchases. In order to buy something with bitcoins, or accept them as payment for the sale of a good or service, all you need to do is sign up on an exchange website—say, Coinbase—and link to a payment account. The exchange creates an e-wallet on your computer that allows you to send and receive bitcoins.
There are different types of wallets, the more popular ones being Mycelium and Electrum. Coinbase, a leading exchange website, offers its own in-house wallet. Those worried about hackers stealing bitcoin should consider a hardware wallet that can be disconnected from the internet.
Each wallet has a private key and a public key. With your public key, anyone can send bitcoins to your account. As long as you keep your private key private, your stash is safe and sound. Unlike a traditional bank account, you don't need a social security number or a tax ID; everything is anonymous. While bank accounts are insured by the FDIC, Bitcoin digital wallets are generally not.
What can I currently buy with bitcoins?
In a word: everything. Over 100,000 merchants around the globe accept bitcoin. Household names include Microsoft, Expedia, Overstock.com and Newegg. There’s even a wide selection of online gambling sites that accept bitcoins. This is a comprehensive list of goods and services you can buy with bitcoins.
How safe are my bitcoins?
Just as someone can steal your physical money, someone can also steal your bitcoins. Bitcoin wallets are protected by a password and a private key. If these credentials are given to an untrustworthy party, your bitcoins can very well be taken. And unlike with banks, there's no way to get your bitcoins back—once they're gone, they're gone.
It's the same deal if you misplace or destroy the computer or device on which your bitcoins are stored. Jered Kenna, one of the so-called “bitcoin millionaires,” reportedly lost more than $200,000 worth of bitcoins when he accidentally deleted them while reformatting his computer.
Hacking is also a problem. In 2016, tens of millions of dollars worth of bitcoins were stolen from Bitfinex. Vox reports there’s even a malware on the Internet that scans hard drives looking for bitcoins.
Can you use bitcoins on the black market?
What partially makes cryptocurrency so appealing is how it securely and anonymously lets users interact. This also makes it appealing to those who want to exchange services on the down low. Currently, the dark web black market, where dealers sell drugs, stolen credit card data, and guns, accepts bitcoin. That said, Wired reported last year that the cryptocurrency of choice is Monero, which released in 2014 and offered users anonymity while also preventing tracking. Bitcoin, in comparison, can potentially be tracked.
Is it the only digital currency?
Currently, there are over a thousand different cryptocurrencies in circulation. The two biggest competing cryptocurrencies are Litecoins, which feature a shorter transaction time, and Etherum, which uses a different blockchain than Bitcoin.
LiteCoin was created in 2011 by engineer Charles Lee, who later took part in building cryptocurrency exchange Coinbase. It uses the same code as Bitcoin, but small modifications make LiteCoin mining faster than Bitcoin mining, which also makes Litecoin transactions faster.
Etherum is new, relative to Bitcoin and Litecoin. The cryptocurrency, which launched in 2015, boasts a faster transaction speed like Litecoin, and also offers a virtual peer-to-peer network in lieu of a mining rig.
Should I buy some?
Contrary to popular belief, Bitcoin and other cryptocurrencies are not likely to disappear anytime soon. That being said, if you want to invest, you must feel comfortable putting your money into something that may very well lose all its value. One financial expert told CNN that buying bitcoin "is almost lottery ticket-like.”
Since it is difficult to predict the value of Bitcoin, you should really only be investing if you’re okay with the prospect of losing it all. Or, at the very least, consider some age-old investment advice, and don’t put all your eggs in one basket.