A beginner's guide to bitcoin and cryptocurrency
In the year 2021, cryptocurrency hit a high point. Bitcoin's value surpassed $65,000 for the second time this year (it had plummeted below $30,000 earlier in the year). And this year, bitcoin — and cryptocurrency in general — made significant inroads into financial services as well as culture, with a growing presence in popular art, commerce, and other mainstream areas.
You've come to the correct place if you're searching for an introduction to bitcoin and cryptocurrencies. We'll go through the fundamentals of bitcoin, such as what it is, where it comes from, and how to buy it, as well as valuation, legality, and practical applications.
But first: A quick backstory
Satoshi Nakamoto, a person (or group) who went by the name Satoshi, founded Bitcoin in 2009. His declared goal was to develop "a new electronic monetary system," which would be "totally decentralised with no server or central authority." Following the development of the concept and technology, Nakamoto handed over the source code and domains to others in the bitcoin community in 2011 and then vanished. (See the excellent 2011 feature of Nakamoto in the New Yorker.)
What is bitcoin?
Bitcoin is a digital currency, to put it simply. It's decentralised, meaning it's not under the jurisdiction of any government, institution (such as a bank), or other authority. Bitcoin connects buyers and sellers with encryption keys rather than utilising names, tax IDs, or social security numbers. Bitcoin is "mined" by powerful computers connected to the internet, rather than being issued from the top down like traditional currency.
How does one 'mine' bitcoin?
Bitcoin is mined by a person (or group, or organisation) using a combination of advanced math and record-keeping. This is how it goes. When someone transmits a bitcoin to another person, the network creates a "block" that contains that transaction and all previous transactions done during a particular period of time. These transactions are recorded in a massive digital ledger by computers running special software, known as "miners." The "blockchain" is a perpetual, publically available record of all transactions that have ever been made, made up of these blocks.
Miners turn these blocks into code sequences known as "hashes" using specialised software and increasingly sophisticated (and energy-intensive) hardware. This is more dramatic than it sounds; creating a hash involves a significant amount of processing power, and hundreds of miners compete for it at the same time. It's like if a bunch of cooks are frantically preparing a new, highly intricate meal, and only the first one to serve up a flawless rendition of it gets paid.
What determines the value of a bitcoin?
The value of a bitcoin is ultimately decided by how much people are willing to pay for it. There is a parallel between how stocks are valued and how they are priced in this fashion.
Only 21 million bitcoins can ever be produced, according to Satoshi Nakamoto's protocol (nearly 19 million have been mined so far), so there is a restricted quantity, similar to gold and other precious metals, but no true inherent worth. (Many mathematical and economic hypotheses exist to explain why Nakamoto chose the figure 21 million.) This distinguishes bitcoin from stocks, which are frequently linked to a company's actual or potential earnings.
"Value" is completely open to interpretation in the absence of a government or central body in charge of supply. This process of "price discovery," which is the fundamental cause of bitcoin's price volatility, also fosters speculation (don't borrow money to acquire bitcoin) and manipulation (hence the well-documented talk of tulips and bubbles).
How do I buy bitcoin?
If you're ready to take on the risk of owning bitcoin, there are a growing number of digital currency exchanges where you may buy, sell, and store bitcoins, such as Coinbase and FTX.
Getting started is as simple as registering for a Paypal account. With Coinbase, for example, you can deposit funds into a virtual wallet of your choice using your bank account (or Paypal account). You can then trade traditional currency for bitcoin once your account has been credited, which normally takes a few days.
What can I do with bitcoin?
While there are certain places where bitcoin can be spent, many people prefer to keep their bitcoins as long-term investments. Bitcoin's price volatility makes it tough to make day-to-day purchases, but a few crypto-powered debit and credit cards are beginning to change that.
Is all of this legal?
For the time being, yes, as long as you don't use it for illicit purposes, just like any other currency. Bitcoin, for example, was the only currency accepted on Silk Road, the FBI-shuttered Dark Web bazaar for drugs and other illegal goods and services that was shut down in 2013.
Since then, bitcoin has generally eluded regulation and law enforcement in the United States, though it is now being scrutinised more closely as it attracts institutional investors' attention. Though it is legal to acquire and trade bitcoin, many parts of the industry, such as investor tax issues, remain unregulated and may be subject to future regulation and/or law enforcement action.
What are the risks?
Apart from the legal and regulatory risks, bitcoin is an extremely dangerous investment and currency. You know exactly how much a dollar is worth when you wake up in the morning. The value of a bitcoin, on the other hand, is extremely volatile, fluctuating dramatically from day to day and even hour to hour.
Bitcoin transactions are difficult to trace back to individuals, though not impossible. They're protected, but they're also hidden behind public and private encryption keys. This anonymity can be enticing, especially as firms and marketers become more interested in tracking our every transaction, but it also has disadvantages.
Are there other crypto currencies?
Yes. Thousands have sprouted up, and more are growing up every day. Other well-known alternative currencies include ether, sol, and ada, in addition to bitcoin, which is the true progenitor of them all.
5 predictions for bitcoin, NFTs and the future of money
Activists hailed digital currencies as a game-changing technology that has the ability to develop new economies and empower those without bank accounts. Crypto's large environmental footprint, as well as its appeal in online crime, have been cited by critics. It will be difficult to bridge the gap between these two points of view.
Much of the bitcoin sector operates as a hype-monster, propelled by bizarre memes of cute pets and emoticons from outer space. The same industry has received a staggering amount of funding from venture capitalists and private enthusiasts, as well as significant technological breakthroughs that have the potential to change the way we interact with money. And, as is often the case with innovation, we may not get exactly what we want.
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