If you haven’t heard of Bitcoin by now, all I can say is: “congratulations on having been recently thawed out from your deep, cryogenic sleep. Be sure to do lots of stretches before you lift anything heavy, and here is a calorie-rich meal-substitute shake to help you with the weight loss.”
The rest of you probably know that Bitcoin is a cryptographically-secured currency that allows for trustless, semi-anonymous transactions between interested parties. But it’s also so much more than that. It’s an incredible new piece of technology that has enchanted, befuddled, and frustrated everyone from government regulators (who basically have no idea what to do with it), to criminals, to aspiring tech billionaires.
In this article we’re going to discuss this exciting cryptoasset, where it came from, and how it’s used.
Where Did Bitcoin Come From?
Bitcoin is a digital currency built on top of the Bitcoin blockchain and introduced by a mysterious figure known as Satoshi Nakamoto in 2010.
The entire Bitcoin origin story reads like something from a Ramez Naam science fiction novel. Just two years after the most catastrophic economic meltdown in history, an unknown tech genius releases a startling new innovation that promises to turn currency into computation while freeing millions of people from the machinations of a financial elite and the meddling of overreaching governments.
In the decade since, there has been an explosion of copies, iterations, and attempted improvements, some of which are trying to displace the original Bitcoin, others of which are growing into entirely new and unforeseen niches.
I would have a hard time believing it if I didn’t know it were true.
Personally, I think a lot of the romance of Bitcoin stems from the way in which its founder has dissolved into legend. Nobody knows whether Nakamoto is still alive, or even whether he is a single person or many.
We have to view all of this with some perspective. While Bitcoin is a remarkable intellectual achievement, most of its fundamental components have been around for some time. Nakamoto didn’t invent cryptographic hashing, distributed ledgers, or even digital currencies. Instead, his/her/their breakthrough was to tie all of this together into a viable, sustainable system.
The result was the first popular cryptocurrency and, some would say, a whole new economic era.
How Does Bitcoin Work?
There are two things I want to make clear at the outset. First, entire books can (and have) been written about how cryptocurrencies work, so everything I say here will necessarily be very superficial. Second, I’m going to confine my discussion to Bitcoin as a currency; talking about how blockchains function will be left for another article.
With that out of the way, here’s what I would like to cover: Bitcoin wallets, Bitcoin exchanges, mining Bitcoin, and using Bitcoin.
If you’re intrigued with what you’ve seen so far, you might want to look into buying Bitcoin. Fortunately, Bitcoin is pretty easy to acquire. Unfortunately, one Bitcoin currently costs about $10,000, so you’re probably going to want to look at getting fractions of a Bitcoin. These are called satoshis.
Bitcoin is usually purchased on a cryptoasset exchange. Like a traditional financial exchange, a cryptoasset exchange is a place to buy, sell, and trade cryptoassets.
There’s rather a lot of variation in the quality and security of the various cryptoasset exchanges. There have already been several high-profile cases of exchanges either being hacked for millions of dollars or going down in flames altogether, taking investor money with them.
Unfortunately there is no foolproof way of guarding against this. You just have to choose higher-quality exchanges while not keeping more of an asset on any given exchange than you’re comfortable with.
Evaluating an exchange can be tricky because the unscrupulous ones deploy various strategies, such as ‘wash trading’, for making it look as though they’re hosting a lot more trading activity than they actually are.
Still, there are a few common sense things you should be on the lookout for:
- Geographical restrictions. Some exchange functions may only be available in certain countries. Be sure an exchange will let you do what you need to do.
- Verification. Almost all exchanges require some form of verification. See what it is before you commit to an exchange.
- Accepted payment methods. Not every exchange will let you use any payment method you want to. This can make using the exchange easier or more difficult, and it’s something you should be aware of.
- Fees. Exchanges usually charge some fee to withdraw, deposit, or trade currencies, and this can impact how profitable any transactions you make will be. Fee information should be easy to find on the website.
All of this having been noted, the prevailing opinion is that Coinbase, Kraken, Gemini, Bittrex, Bitfinex, and Poloniex are reputable and probably safe.
As its name suggests, a wallet for a digital currency is analogous to a wallet for physical currency. It’s essentially a piece of software which can be installed on your desktop, online, on your phone, or as a separate, detachable piece of hardware.
But Bitcoin doesn’t actually exist anywhere, so what your wallet contains is a private key that gives you ownership of the Bitcoin associated with a public address. With the right private and public key together, transactions with Bitcoin become possible.
There are many wallet services available. Most of these are free, with the exception of a physical wallet which has to be purchased. Keep in mind that if you lose the private key for your Bitcoin, they are gone forever. There is no way to get them back. Also, anyone who manages to get your private key will be able to get your Bitcoin.
So you need to keep the private key as secure and secret as you can manage.
What Is Bitcoin Mining?
It’s unlikely that you’ve heard of Bitcoin and not heard of Bitcoin mining, so I’ll say a few words about it. In keeping with my early wish to not get too deep into the fundamentals of the blockchain, I’ll keep these remarks friendly for non-technical sorts.
If you’ve made it this far you might’ve wondered how new Bitcoins are created. The answer is: by the Bitcoin blockchain. About every ten minutes or so, on average, the blockchain mints a new Bitcoin and awards it to whomever managed to verify a ‘block’ of transactions by solving a cryptographic puzzle.
In this way, the blockchain simultaneously controls the rate at which its currency is released while also incentivizing its own users to keep it secure. Pretty clever.
If you’re now scrambling to set up a dedicated mining rig, my advice is not to bother. At this point in the game there are some serious, serious players in the crypto mining space. I mean the kinds of people who buy hundreds of thousands of dollars worth of computers and stuff them in a warehouse in Iceland so that they can reduce cooling and ventilation costs by using the country’s cold water and cold air.
It’s not inconceivable that you could be the one to solve the hash puzzle with your Alienware laptop and get the Bitcoin, but it’s spectacularly unlikely.
Does Bitcoin Have a Future?
We’ve had 1300 words or so to say about where Bitcoin came from and how it works, but the question remains: what’s the point? We might like it for its audacity and technical sophistication, but is there any reason to think of it as potentially being a huge source of disruption?
I think so. It’s barely been a decade since Bitcoin was released into the world, and in that time there have been plenty of transactions made with it but nothing like widespread adoption. Instead, it seems to primarily be a speculative investment vehicle, both for those who want to actively trade and those that want to buy and hold Bitcoin until it becomes really valuable in the future.
There are a few reasons why this doesn’t bother me. First, ten years isn’t much time to adopt, deploy, and innovate on a technology like Bitcoin. I’m sure the internet was fairly unimpressive ten years after the first version of it was built, but look at where it is now. Second, there are a nearly unlimited number of things you can do with cryptocurrencies, and since Bitcoin was the first big one I think it has real staying power.
And finally, the world needs something like Bitcoin. There are too many places where it could be used, and too much money to be made with it, for it to languish in obscurity.
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