Bitcoin has been on a somewhat incredible-seeming upward trend recently. You can regularly see articles talking both about bitcoin “surging” and “crashing” all in the same week. This is no surprise coming from a media industry that is ever more senationalistic. But because of this, Bitcoin has been registering on the radar for more and more people who have never even heard of a digital currency before. Bitcoin may actually be the most important invention in the last 500 years. And since currencies both have government and economic implications, let me see how I can help..
Bitcoin is a cryptocurrency, which is a digital currency defined by a cryptographic protocol designed to keep the currency mathematically secure. With a cryptocurrency, if you send, say, 1 bitcoin to Alice, she can verify that she received the bitcoin by using some math, and only Alice can then use that bitcoin by doing some more math. This is very different than your usual currency, where you can only verify that you have received money by asking a trusted authority, like a bank. Even if you’re using cash, you don’t really know whether or not that cash is part of the $200 million in counterfeit money currently in circulation, unless you ask a bank or the government.
And this is where the power of a cryptocurrencies lies: people can send each other money without involving a bank or a government. This is why a slogan often heard in the Bitcoin community is: “Be your own bank”.
Bitcoin isn’t the first digital currency, but it’s a first-of-its-kind currency in a lot of different ways:
- Transactions are irreversible. Only the holder of the wallet key (similar to a long password) can access the bitcoins in that wallet.
- Cheap transactions. You can send someone $1 million for a fee of less than $2. Transactions used to be free, but have recently become somewhat expensive for day-to-day purchases. However, if plans for the Bitcoin lightning network bear fruit, these transaction fees could drop to less than a cent.
- The bitcoin network is decentralized. No central authority can print more bitcoins, freeze someone’s account, or seize someone’s coins. Bitcoin holders don’t need to trust anyone in order to maintain or use their bitcoins, and any changes to the Bitcoin protocol can only happen if most people in the network agree to those changes.
- No inflation. There will eventually be a maximum of 21 million Bitcoins, and about 80% of them already exist.
Bitcoin visionaries see Bitcoin as the first currency that will be truly global. A currency that can cross borders as easily as exchanging hands. A currency where spending 1 cent is just as cheap as spending $1000 or $1 million in seconds rather than days. Many also see the currency as en escape from government manipulation and a platform that can enable a huge assortment of new financial applications.
There are 3 major things that Bitcoin is based on:
- The Blockchain
- Consensus Rules
Bitcoin’s cryptography ensures that only you can spend your bitcoins. Bitcoin’s blockchain ensures that all the transactions are recorded so that other people can verify that you sent them some bitcoin. And, importantly, Bitcoin’s Consensus Rules can not be changed by any central authority, and instead, users can choose to or not to opt into changes.
But how does this all work? And why does this make Bitcoin worth real money?
Continue reading “So you Wanna Understand Bitcoin… (Part 1)”