Let’s start with a basic explanation of what Bitcoin is. Bitcoin is a form of cryptocurrency just like the U.S. Dollar is a form of traditional currency. Theoretically, you can use cryptocurrency (crypto) to buy things online or in person. In practice, many merchants do not accept cryptocurrencies due to their high volatility. Unlike traditional currency, cryptocurrencies tend to have frequent and often drastic price changes.
New forms of cryptocurrency pop up almost every day; there are currently over 2,500 known cryptocurrencies listed online. Many of them offer something unique, like being tied to the value of gold or backed by new technology. Safe to say there’s probably a cryptocurrency out there for everyone. Despite the small differences, all cryptocurrencies work basically the same way and everything written in this article can be applied to all forms of cryptocurrency, not just Bitcoin.
If Bitcoin is a currency, why does its value go up and down so much? Due to their high volatility, many analysts note that cryptocurrencies behave more like equities than currencies. Even the SEC is unsure how to classify cryptocurrencies. Just like with equities, the law of supply and demand is proudly at work here. Unlike traditional currencies that trade in the open market and can be created by a country’s treasury, crypto has a pre-determined number of coins. Thus, when coins are bought and sold, the price moves quickly based on market demand.
What is the underlying technology used by Cryptocurrency? Blockchain is the technology behind crypto. If you are happy with that explanation, feel free to skip ahead to the next paragraph, otherwise, here is a really nerdy explanation of blockchain. Any time a transaction with Bitcoin or other crypto occurs, it’s recorded in files called blocks. A block usually holds about 500 transactions. Whenever a new transaction is sent to a block on the blockchain, other computers on the chain must verify it before the transaction is completed. Think of this like the bank checking to make sure your signature looks right before cashing a check. Every computer connected to the blockchain network has the same copy of the blockchain, which means it would be almost impossible for hackers to manipulate cryptocurrency transactions. To do this, they would have to find a way to change the blockchain records on every computer connected to the network.
When I buy a Bitcoin, what do I actually get? Well, disappointingly, you actually get nothing. You don’t own a piece of a company, like you do with a stock. You don’t own any physical object, like you do with a bar of gold. You don’t even get a Bitcoin debit card. When you buy a Bitcoin (or fraction of a Bitcoin, since a whole Bitcoin would be over $12,000), that fraction of a coin goes in your “digital wallet”.
Remember when we said earlier how Bitcoin is unhackable and very secure? Well that’s true, but unfortunately humans are not. If someone were to gain access to your virtual wallet (by stealing your username and password, for example), they would be able to drain all of your cryptocurrency fairly easily. And since all cryptocurrency transactions are anonymous and untraceable, once the crypto is gone, it’s truly gone. Tracking down someone who stole your virtual currency would be next to impossible.
Despite being the internet coin of the future, not many people are using them as actual coin. Most people’s hesitation comes from the fear of the unknown and swift and often extreme volatility. Experts warn that Bitcoin needs to be spent to be taken seriously. This makes a great deal of sense – if cryptos want to be considered currencies then they need to be widely used and accepted for everyday transactions just like traditional currencies. Until Bitcoin and other cryptos are being regularly used for goods and services, it’s probably safe to consider them speculative, high-risk investments.
Now that you know the basics of cryptocurrency and Bitcoin, feel free to take your knowledge to the next level. A good place to start would be memorizing all 2500 cryptocurrencies. Although by the time you read this, there will probably be 2600.
-The Means Team