Bitcoin is hardly the only cryptocurrency, but it is the most popular and has become something of a bellwether.
The price of a single Bitcoin rose from just under $1,000 at the beginning of 2017 to nearly $20,000 by the end of the year.
More recently the price has been staying well below $10,000.
And, while Bitcoin has been stealing all the headlines, it’s major competitor, Ethereum, has actually experienced even more dramatic price swings, though at much lower levels.
After trading for just pennies in 2015, the price boosted an all-time high over $1,400 early this year.
That’s a wild ride, but it’s the kind of price action that gets your attention. It’s certainly gotten mine.
Up until a couple of months ago I mostly ignored Bitcoin.
But it’s recent popularity, as evidenced by the incredible price run-up, is making me wonder if it’s time to become a believer in cryptocurrency, as a whole.
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But, before we get too caught up in price swings, let’s talk about some basics.
WHAT IS BITCOIN?
Bitcoin (BTC) is the largest and best known of the many cryptocurrencies.
In theory, it’s a currency – or at least it’s supposed to be.
I say in theory, because it isn’t an acceptable method of payment in most places. It may have been intended as a currency, but right now it’s functioning more as a very speculative investment.
Bitcoin is a digital currency released as open source software in 2009.
It was created by software developer Satoshi Nakamoto. Curiously, Nakamoto isn’t even a real guy. The name is a pseudonym for someone who prefers to remain anonymous.
The basic characteristics of Bitcoin are that it only exists on the Internet, is not issued by any government or central bank, and is limited to just 21 million units. However, each of those units can be divided into 100 million Satoshi.
The total amount of Satoshi that can be potentially created is – get this – 2.1 zillion – if you can imagine a number that large.
Ironically, while a Bitcoin, worth something on the order of $10,000, would be completely impractical to use as a payment method, a Satoshi – which is worth a small fraction of a penny – wouldn’t be enough to buy a single M&M.
Here is the Bitcoin price history from early 2013 through the spring of 2018:
In this article, I’m going to discuss cryptocurrencies in general, but Bitcoin in particular.
It’s by far the most important cryptocurrency, and the one is getting all the attention – at least for now.
But there are other cryptocurrencies as well (over 1,600 now!), and we might want to keep an eye on them (well… a handful, perhaps).
HOW CRYPTOCURRENCIES WORK
This stuff is incredibly complicated and I certainly don’t claim to be an expert.
But I want to do a high-altitude discussion of the mechanics of cryptocurrencies.
I’m going to try and make it simple, though I’m not sure that’s even possible. If you’re not interested in how cryptocurrencies work – and you just want to accept that they exist and go from there – feel free to skip over this section (I would if I were you!).
Blockchain Technology
This is the “nuts and bolts” that cryptocurrencies are built on, including Bitcoin.
It’s a chain of information registration and distribution that’s operated by cryptocurrency participants. Once again, there’s no government, central bank, private bank or corporation operating behind the scenes, and making it all work.
Blockchain is quite literally a series of transactions between individuals and their computers.
In fact, one of the primary attractions of cryptocurrencies is the fact that they don’t pass through banks and other financial institutions. They literally operate between individual users.
Private Key. This is a unique code that contains encrypted details about each individual Bitcoin, including its ownership. The private key enables the owner to engage in business transactions without ever revealing his or her identity to other parties.
There are advantages and disadvantages to these anonymous transactions, but we’ll get into those separately.
There are actually two keys with Bitcoin, one private, one public. The public key is your Bitcoin address, which everyone can see. The private key is secret. Anytime you make a transaction, you combine both your public and private keys together. This acts as a certificate that verifies that the transaction came from you. But your information and your account are completely safe as long as you don’t publish your private key.
Transactions are authorized by the blockchain networks application and maintenance of its protocol.
On a practical level, transactions work very similar to the way they do with other online payment methods, like credit cards, debit cards and PayPal.
The major difference being that the transactions are directly between buyer and seller, and never pass through an intermediary.
Are your eyes glazing over yet?
Bitcoin Mining
“Mining” is the process by which Bitcoin comes into existence.
As I said earlier, no more than 21 million Bitcoin can ever be produced. “Miners” are the people who enable that production to happen. They get a reward of Bitcoins (or a percentage of) when they successfully create a “hash”.
Let me explain…
Within the Bitcoin network are individuals and businesses who keep records of the transactions. All transactions are collected for a given period of time, onto a list, which is known as a “block”. This is where the blockchain comes into play.
In order to verify the activity, an updated copy of the block is given to everyone who participated in it. The miners then take each block and apply a mathematical formula to it.
This creates a short, random sequence of letters and numbers – the hash.
The hash is stored at the end of the blockchain, and then each block is sealed off.
That’s when the miner receives his or her reward of Bitcoin, inching the total closer to the ultimate maximum of 21 million.
The miners use software written specifically to mine blocks. The reward provides an incentive for minors to continue to perform their function, and increase the number of Bitcoin.
That at least is my interpretation of how the process works. I’m pretty sure it’s actually more complicated than that. But I think you have to be a cryptocurrency insider to really understand how it works.
This explanation will work for our purposes. I don’t want to beat this discussion to death because I really don’t understand the process myself.
If there any cryptocurrency experts reading this article, feel free to jump in – please?
THE ADVANTAGES OF BITCOIN (AND CRYPTOCURRENCIES, IN GENERAL)
Apart from the recent profit potential of cryptocurrencies, they actually do have certain core qualities that all but guarantee they have a future.
There are even opinions that cryptocurrencies, or at least blockchain technology, will be as revolutionary as the Internet.
But closer to the ground, here’s what gets people excited about cryptocurrencies…
Privacy. This is one of those cherished qualities that’s just about disappeared in 21st Century. Since most transactions happen online now, somebody somewhere knows everything you do with your money.
It’s making at least some people uncomfortable and is one of the forces driving cryptocurrencies.
Privacy comes about as a result of the ability to conduct financial transactions without providing any information that identifies you personally. It’s an invisible medium of exchange, much like cash – except that you can use it to make online transactions.
Cryptocurrencies can be as easy to use as credit cards. Because they exist online, you can use them to make financial transactions the same way you do with credit cards and debit
No chargeback capacity. This is another feature of Bitcoin that appeals to merchants. Anytime you make a purchase with a credit or debit card, you can charge it back if for any reason you’re not satisfied with the transaction.
In most cases, the card issuer will take your side against the merchant.
But with Bitcoin, every purchase is final.
You can always dispute the transaction with the merchant, but it’s never an automatic process.
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