The Year of Bitcoin
This year, America went crazy on cryptocurrency. Bitcoin’s price rose above the roof and the world took notice. People who’d never thought about investing in currencies started googling “how to trade bitcoin”. Bitcoin and other cryptocurrencies are making room for a completely different vision of how the economy operates. It’s new. It’s cheaper. And it’s not controlled by banks. But what should you know before you get your feet wet with bitcoin? There are plenty of guides out there. This post serves as an avenue to provide readers with the absolute “need to know” to get involved in the ecosystem. We’ll attack some frequently asked questions and leave room for further reading for folks that want a bit of a deeper dive.
Bitcoin – Frequently Asked Questions
What is bitcoin?
Bitcoin is a digital currency that was created in 2009 by an unknown using the alias of Satoshi Nakamoto. The currency, also considered a cryptocurrency, is produced by people all over the world that use high-powered computers to solve complex mathematical equations to “mine” bitcoin.
How owing bitcoin different than owning regular USD?
There’s no Fed controlling the flow of money during financial crises. At one point in time, USD was backed by gold (of course now it’s backed by “confidence”). Well, in the case of bitcoin, instead of being backed by gold, the currency is based on mathematics. Bitcoins are produced by following a mathematical formula that’s accessible online.
Besides what it’s backed by, bitcoin has five defining characteristics:
There’s no central authority. No one can mess with monetary policy, cause a meltdown, or take people’s bitcoin away.
It’s anonymous (for the most part)
All that’s logged on the blockchain for bitcoin transactions is your bitcoin address. Your bitcoin isn’t linked to your name, address, or any other personal information. However, there are still some ways to figure out who the owner of bitcoin is if need be.
Bitcoin uses the blockchain, which stores each transaction on a huge general ledger.
It’s transaction fees are lower
On international transfers, you may be charged an arm and a leg. Bitcoin charges a dramatically lower fee.
Once your bitcoin is sent, there’s no getting them back
This is one of the risks with bitcoin. If you end up in a fraudulent transaction or have your money stolen by a hacker, there’s really nothing that the network can do. That’s when a bank or a central authority would actually come in handy.
What can bitcoin be used for?
Bitcoin can be used for just about anything a US dollar is used for. In 2017, the world became crazed over bitcoin trading because of its massive rise in value. Some early adopters have become millionaires from buying and selling bitcoin. But bitcoin can also be used for everyday purchases. Each day, more merchants accept bitcoin as a payment and adoption will continue to evolve. Whether you want to buy a meal, a plane ticket, or shoes, you can buy it with bitcoin.
How do I get started using bitcoin?
To get started with bitcoin you need a bitcoin wallet. Top players in the U.S. for bitcoin wallets are Blockchain and Coinbase. There are mobile wallets, desktop wallets, online wallets, hardware wallets, and USB wallets to choose from. If you’re a beginner, you’re better on with going with one of the bigger players who already have a strong reputation and community. From there, you need to go to an exchange and use your wallet to exchange your current currency for bitcoin. In the case of Coinbase, the company provides both the wallet and exchange. In the case of Blockchain, the company specializes in digital wallets and works with a vetted list of exchanges.
What are the cons of owning bitcoin?
Bitcoin has garnered a lot of interest in its early years of conception, but the currency does not come without its cons. Because bitcoin is a new form of currency, mass adoption hasn’t happened, yet. Not every merchant accepts it and not all your friends own a bitcoin wallet. Bitcoin needs to continue to build the size of its community to receive the benefits of network effects. Imagine having Facebook during its first year. The utility of the network is limited. Now its utility is extreme. For a currency to be useful, the people have to buy in.
When you think about American USD, you know that there’s a certain amount of credibility that it holds. Regardless of what you hear in the news about the debt ceiling, the GDP, Donald Trump, or global conflicts, you know that when you go to the gas station, you can hand the cashier your dollars and change with full confidence. Although we deal still with inflation, the USD is pretty stable. Compared to bitcoin, the USD is still much more stable. At the beginning of 2017, one bitcoin was priced around $1,000. Now, it’s valued over $4,000. You would never see that type of rise in value in the USD. But just as bitcoin rises, it can also fall. This chart tells it all. 2014 and 2015 were dark years for BTC. And dark times can come again.
What’s the blockchain?
It’s the glue that keeps the bitcoin universe together. Each bitcoin transaction is confirmed and creates a “block” on the blockchain ledger. It’s transparent and run by a community of developers who solve mathematical problems to confirm transactions. One key feature is that blockchain can be used for more than bitcoin transactions. It has the capability of logging the transfer of all kinds of value. Ethereum created a platform on top of the blockchain for “smart contracts”. Applications of blockchain technology are much larger than bitcoin. The blockchain is predicted to change a multitude of industries including finance, healthcare, music, and identity.
How is bitcoin stored?
Each bitcoin transaction needs two things: a bitcoin address and a private key. The private key is meant to be kept secret. But don’t lose your key. If you lose it, your bitcoin will remain dormant forever. Decentralization has its cons. You can’t call the bank to redeem your account.
Where can I learn more?
Here’s a list of resources that I found helpful when learning about bitcoin and blockchain: