Bitcoin has received much attention from mainstream media outlets this year, and for good reason: since January 2017, it has risen in price from around $800 to almost $20,000. Many speculators consider the current Bitcoin boom to be a bubble, but others hold onto hope that Bitcoin may rise to $100,000 or even $1M in years to come. For such a young currency, Bitcoin has made significant waves in the financial industry; however, it is still widely misunderstood by the public at large.
What is Bitcoin?
Bitcoin is a currency, much like the U.S. Dollar. What separates it from any normal currency is that it is decentralized, meaning no institution or organization centrally manages transactions, nor could they even if they wanted to. Instead, Bitcoin operates on a peer-to-peer basis; that is, transactions are recorded publicly and distributed throughout the Bitcoin network at regular intervals of roughly every 10 minutes. This running trail of transactions is called the Blockchain, and serves as the 'central bank' for Bitcoin. Discrepancies in the transaction logs are reconciled on the basis of popular vote, so double-spending and fraud are virtually eliminated. If that sounds confusing, don't worry, because it is! Essentially, money is transferred by publicly announcing the transfer from sender to recipient. Everyone on the blockchain receives these notices. If someone attempts to spend the same Bitcoin twice, their second transaction will be denied by the Bitcoin network because the first transaction will have already posted to the blockchain.
Should You Trust Bitcoin?
Part of what makes the Bitcoin network successful is it's transparency. The complete inner workings of the Bitcoin network are open source, meaning any developer can view the very code that runs the platform. This transparency helps researchers and developers evaluate the security and effectiveness of the math behind the movement, and so far, everything checks out. The biggest threat to the network is actually the inability of many users to adequately protect their holdings. Any hacker who manages to locate the private Bitcoin key on your computer effectively owns your Bitcoin, and humans are notoriously bad at managing their own security. A simple virus, or even a hard drive crash, could cause someone to lose the key to their wallet and their Bitcoin forever - if this sounds intimidating to you, contact an expert (like Colorado PC Pro) prior to investing in Bitcoin.
What is Mining?
Easy answer: Mining is the way new Bitcoins are generated. Millions of computers (miners) contribute their processing power to solve difficult math problems which effectively balance the Bitcoin checkbook and earn them a small reward of Bitcoins.
Complicated answer: A 'Bitcoin miner' is simply a number-crunching computer on the Bitcoin network. Bitcoin mining forms the backbone of the blockchain. Again, the blockchain is essentially just the ledger of all Bitcoin transactions ever made and is shared among all users of the Bitcoin network. When I said that transaction logs on the blockchain are reconciled by popular vote, I didn't mean that you or me get to decide - that is left up to Bitcoin miners. During those 10 minute transaction cycles I mentioned earlier, Bitcoin miners turn pending transactions into mathematic puzzles and race to be the first to solve them.
The first miner to solve the problem, which is most likely actually a large pool of smaller miners, receives 25 Bitcoins (roughly half a million dollars at the time of this writing) and shares the solution with all the other miners currently working on the problem. Once all miners are in agreement that the solution has been found, these transactions are written to the end of the blockchain and distributed across the Bitcoin network. The financial reward for solving the problem provides the motivation for becoming a Bitcoin miner, preventing any one group from monopolizing all of the mining power and writing false transactions to the ledger. Essentially, everyday people like you and me can contribute our computer power toward Bitcoin mining and receive a very small payout in return. Many companies exist that will use your computing power to contribute to a larger mining pool and pay you a fraction of each successful mining cycle based on your participation.
How Do You Store Bitcoin?
Easy answer: most users can simply download a popular Bitcoin wallet application, like Electrum, to store their Bitcoins much like PayPal can store their dollars. You access this application with a password and can send and receive money from the visual interface. You can also use an online Bitcoin wallet, which is considered less secure but can be more accessible.
Complicated answer: This is where Bitcoin gets the name 'cryptocurrency' from. A Bitcoin 'wallet' is simply a random string of numbers and letters that tell people where to send money (My Bitcoin address is 1BvtEfQGcY3fxsoBwL7nKMLBSjx4g2Poy5). This random string is generated from a private key (a much longer string of numbers and letters) that you can keep digitally or on paper. Keeping this private key totally private is absolutely essential to retain ownership of your Bitcoins. Think of it this way: your private key can be used to easily generate your Bitcoin wallet's address, but your bitcoin wallet's address cannot be used to reverse-calculate your private key: reversing the calculation is mathematically infeasible using current technology.
This public/private key infrastructure is the basis of Bitcoin cryptography and also how the modern Internet works. You need your private key, which proves you are who you say you are, to send money, which includes sending it to an exchange to convert it into physical currency like U.S. dollars. If someone else takes possession of your private key, they effectively become the new owners of your Bitcoins. In this case, possession is ten tenths of the law.
How To Buy Your First Bitcoin
Before you buy your very first fraction of a Bitcoin, you need to choose a wallet where it will be stored. You can compare wallets and wallet types at Bitcoin.org. Once you've chosen your wallet, set it up and received your Bitcoin address, you can choose an exchange to purchase your first Bitcoin. As described on the Exchanges page on Bitcoin.org, "exchanges provide highly varying degrees of safety, security, privacy and control over your funds and information", so choose wisely from a list of reputable vendors. Once you've purchased your Bitcoins, you should find it in your wallet near-instantly - there are no wait times for transactions like you normally experience with centralized banks. Keep in mind, you do not need to buy a whole Bitcoin. As prices increase, one Bitcoin is quickly becoming out of reach for normal investors. Millionths of a Bitcoin are called Bits, and there are other denominations called mBTC and Satoshi out there, as well.
What Are These Other 'Coins' On The News?
Bitcoins started a revolution of digital, anonymous, cryptography-based currency that is booming today. In fact, there are well over a thousand variations of cryptocurrency, each practicing their own method of blockchain transactions and mathematic cleverness. Some of the names of these 'altcoins' are Ethereum, Ripple, Bitcoin Cash, Litecoin, or Dash. You could think of many of these as the penny stocks of digital currency, but some of them approach the field in truly novel ways in an attempt to perfect what Bitcoin started. Once you're comfortable with Bitcoin, you could think about moving into the altcoin market as a speculator or day-trader. Keep in mind, however, that many of these altcoins exist only to scam people out of their hard-earned money.
Should You Invest?
The ultimate question of whether or not you should invest is entirely dependent on your investment strategy. Bitcoin is not a 'get rich quick' scheme, nor is it a new technology. In fact, it is among the most volatile currencies publicly available to trade. If you decide Bitcoin is for you, ensure you have a thorough understanding of the market and the risks involved. Although it should go without saying, I am not a financial advisor and this blog post is only meant to provide information to those curious enough to seek it. Nothing I've described in this post should be interpreted as financial advice and, in fact, you should seek the assistance of a financial advisor if you decide to invest in Bitcoin or any other cryptocurrency.