The talk of Bitcoin has spilled out of the cryptocurrency world and has taken over the Twitter finance community. Bitcoin memes and charts are the latest craze on social media, and I’m being asked about it daily by my family, friends, and neighbors. People that have never traded or invested are fascinated by Bitcoin, and they want to know what it is. This post is intended to help those folks understand the basics of Bitcoin and the blockchain.
Bitcoin is a type of digital currency that can be used to make financial transactions outside the regulated banking system. It’s similar to PayPal, in that it can be used for buying and selling online. However, unlike other currency that is directly valued by a particular nation, Bitcoin is independent and is its own currency. It can be converted to and traded against other currencies.
Bitcoin uses encryption techniques to verify and process transactions, and to self-regulate the generation of new units of currency. This platform is known as blockchain technology, and it was initially created based on the white paper by Satoshi Nakamoto.
A blockchain is a digital public ledger of transactions for cryptocurrencies. It has no central control in place; there is no phone number to call and no customer service. All transactions that are sent through the blockchain and are verified, are considered to be final. The electronic ledger grows as completed transaction blocks are added to the public record. This is achieved by computers connected to the network, all of which get a working copy of the blockchain ledger. These ‘Bitcoin miners’ compute the transactions on the blockchain, receiving transaction fees and new bitcoins based on their processing speed.
Bitcoin is not an investment, it’s a cryptocurrency that is backed by speculation. The value of Bitcoin is based on the belief that it will be accepted as a mainstream currency. A Bitcoin is divisible and can be spent in decimals, but unlike government fiat currency, the total supply is limited to 21 million Bitcoins. Because it can be traded on exchanges, traders can speculate on it’s increasing value based on its limited supply, as opposed to government fiat currencies that have an unlimited supply.
The price run up on Bitcoin is based on speculation that it will be the winner in the race to perfect cryptocurrency/blockchain technology. The winners of this game will be richly rewarded, but Bitcoin is only the first of many attempts to master this new platform. There’s a long way to go.
Like the Internet in the late nineties, blockchain technology is in its infancy. It’s inefficient in the way that its network processes transactions simultaneously, and the use of personal and public keys and wallets to complete encrypted transactions makes for a complex system. But there’s little doubt that blockchain technology and the creation of a decentralized, electronic ledger, is the future.