Have you ever seen or read a new headline about cryptocurrency or Bitcoin? Chances are you have and you may have wondered to yourself, what exactly is this whole Bitcoin thing about anyway? If so, you’re definitely not alone.
Even people who will happily talk about Bitcoin socially may not really have a good understanding of what it is and how it works.
So, we thought it would be useful to put together a very straightforward article that explains cryptocurrency, what it is, why it matters, etc. Let’s dive right in.
What the Heck is Cryptocurrency?
Simply put, cryptocurrency is digital money. It is a ‘virtual’ medium of exchange, rather than a currency backed by or connected with any particular nation or government (like the US Dollar). There are many different versions of cryptocurrency, with Bitcoin being the most well-known. But, you may have heard of Dogecoin, Ethereum, or some other versions, as well.
How Does a Currency Work if it isn’t Issued by a Government?
We’re all used to dealing with money that is created and issues by various governments around the world. But, cryptocurrency is different. It wasn’t created by any government and no government controls how it is issued.
It also doesn’t involve the banking system, which is another way that it varies from traditional currency, which is created/issued by a government and then uses the banking industry to effectively manage the distribution and transactions related to using the currency.
Cryptocurrency is not stored in a bank and transactions related to the digital currency also occur outside the banking system entirely.
Can you Actually Buy Things with Bitcoin?
Yes! Various companies have elected to accept Bitcoin or another cryptocurrency as a means of payment. You can use it to buy products online or book a hotel on various travel sites, among other things. However, most stores and companies still do not accept cryptocurrency as a means of payment.
OK, so Where Does Bitcoin Come From?
Great question! Since it isn’t issued by a government or processed in a bank, where does a Bitcoin come from? The process of creating Bitcoins is called ‘mining’. People (individuals, companies, etc.) can dedicate computer servers to the process of solving complex math problems and in the process, they create new Bitcoins. They thus create or earn a new Bitcoin. Creating other cryptocurrencies is done in a similar way.
However, creating these new Bitcoins is a laborious process for the computer and so they aren’t ‘easy’ to mine. Bitcoin actually has a built-in limit of 21 million coins as the highest number that can ever exist.
So, once that last Bitcoin is mined, no more can be created. As of 2021, about 83% of that 21 million limit has already been mined. It is possible that the Bitcoin protocols could be changed as that limit is approached, but for now, that is the hard limit.
What is a Bitcoin Worth?
Like any currency, the value of Bitcoin (or any cryptocurrency) varies based on people buying and selling them on a Bitcoin Exchange. Think of it a bit like the stock market. A Bitcoin is worth what a buyer is willing to pay, which is impacted by what all the other buyers are willing to pay, based on historical transactions and what they think will happen in the future. As of October 5, 2021, a Bitcoin is worth $49,780. However, cryptocurrency values are inherently volatile.
Without Banks, How do you Store a Bitcoin?
Bitcoins and other cryptocurrencies are stored in a ‘digital wallet’. These act like secure file folders that can exist on a person’s computer or in the cloud. Digital wallets can also be used to send or receive Bitcoins, allowing them to be used in transactions. However, unlike bank accounts, these digital wallets are most definitely not insured by the FDIC.
This can lead to some of the risks of owning Bitcoins. Store it in the cloud and there is always the chance a server is compromised and your Bitcoin is stolen by a hacker. Store it on a drive on your home computer and a virus could destroy it, you may lose the password, or people have even mistakenly thrown away an old computer, not realizing it has a digital wallet with Bitcoins in it.
What About Blockchain?
If you’re heard of Bitcoin, then you have probably heard the term blockchain used when discussing cryptocurrencies. We’ll keep this very simple because it can get complicated. A blockchain is essentially a public ‘ledger’ of transactions that records the information on all those transactions in a way that is very difficult to hack or alter. The technology involves having a duplicate record of all these transactions stored on computers across an entire network of servers, making it very hard to hack.
All those cryptocurrency transactions are stored in this public, distributed accounting ledger ensuring the accuracy of the system for everyone involved in exchanging Bitcoin or another cryptocurrency.
We hope this helps you get your head wrapped around cryptocurrency and Bitcoin!
