“What is Bitcoin?” Bitcoinology in Layman’s Term

It was in October 31, 2008 when Satoshi Nakamoto published his/her invention to a research paper called “Bitcoin: A Peer-to-Peer Electronic Cash System” and by January of 2009, Nakamoto released Bitcoin (BTC) as an open-source software in 2009, with Nakamoto mining the first ever set of bitcoins (50 bitcoins to be more specific) known as the genesis block.

As with any other ‘new’ inventions, a lot of people were reluctant at first about how this new cryptocurrency will benefit us in how we deal with our money and ultimately, if people will actually eventually use bitcoin in their transactions just like how we use paper money now.

There were naysayers of course, but on the other end of the spectrum were the early adopters. Aside from its contributors and programmers being the first supporters and recipients of bitcoin, people over at the BitcoinTalk forum were very much into this new, cool “internet money”.

Bitcoin Internet Money Giphy

Bitcoin is so much talked about these days, especially in online forums and Reddit. via Giphy

The rise of the Bitcoin

In May 22, 2010 back then when bitcoin was just over a year old, Laszlo Hanyecz paid a fellow BitcoinTalk forum member 10,000 BTCs (bitcoins) for two Papa John’s pizzas. This forum user paid just around $25 for the two pizzas which were at a discount at the time. By today’s exchange rate (at the time of writing) those two pizzas bought for BTC 10,000 are now valued at $26.7 million effin’ dollars. This, my friends, is the reason Bitcoin Pizza Day is celebrated every 22nd of May.

Everything has changed since then. Nakamoto’s identity remains unknown up to this day, but this invention left by Nakamoto has already sparked discussions and innovation in the fintech (financial technology) world.

It is officially a fad. Often referred to as internet money, Bitcoin has grown amidst scandals (especially the high profile Mt. Gox scandal where 774,000 bitcoins went missing) and volatile fluctuations that it has now become an everyday term.

Bitcoin ATMs and shops accepting bitcoin are proliferating. And everyone’s talking about how they wished they got themselves that bankable cryptocurrency when it was still 1BTC=USD$1 (yes, that includes me). Thousands of bitcoin trading transactions are going on as I write this, and it looks like this internet money isn’t going nowhere.

It’s staying.

What is Bitcoin, anyway?

As a quick Google search defines it, Bitcoin is a type of digital currency or cryptocurrency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.

In layman’s term, it’s a digital money that you can use to purchase stuff online or offline, just as you would like any other kind of money. It is not regulated by any institution like the government or central banks, which allows for bitcoin transactions to seamlessly flow through the internet without any complex requirements (you can even transact anonymously).

Wait, so how does Bitcoin work?

Imagine having a dollar bill in your wallet, and you use it in a transaction to buy or sell stuff (or just plainly send money to someone) as you normally would.

We’ll, that’s it. That’s basically how bitcoins work. Just like real money, but this time, your money is encrypted and digitally sent over the internet.

A transaction is a transfer of value between Bitcoin wallets. Your wallet keeps a secret piece of data called a private key or seed that is used to sign transactions, proving that the transaction is in fact from the wallet itself. This prevents transactions from being manipulated by someone else once it is sent.

In order for a complete bitcoin transaction to happen, you need to have two things:

  • You have to install a bitcoin wallet to your computer or smartphone

Bitcoin wallets usually can be downloaded for free. After installing your wallet, it will generate and give you a unique Bitcoin address that you can give to someone else so they can send you money, or the other way around. It works much like your personal email address, only thing here is that you can only use one bitcoin address per transaction (you have to generate a new bitcoin address for each transaction).

  • You need to have actual Bitcoins that you can spend (or at least receive Bitcoins that you can spend)

The easiest way to get bitcoins is to buy them. As with any other currencies, Bitcoin prices fluctuate according to how the market values it. The most trusted and widely recognized online platform to buy Bitcoins is Paxful, which also gives you your own Bitcoin wallet (a one-stop shop for your Bitcoin needs). It is also most convenient to buy Bitcoins with Paxful, since you can buy Bitcoins for as low as $20 using your gift card and credit card, or via cash deposits, bank transfers, or online transfers such as Paypal and many other options.

If you don’t want to buy bitcoins, however, you can choose to earn it buy selling stuff or providing services in exchange for Bitcoins. The most popular platform where you can earn bitcoins buy selling stuff is through Bitify.

The quick and easy video below perfectly sums up how bitcoins work:

Easy, eh? But there’s more to that. I’m sure you still have more questions waiting to be answered:

How do I make sure that the bitcoins I send over the internet actually reaches its recipient, without someone interfering or stealing my BTCs while on its way?

Enter the Blockchain.

Bitcoins and other cryptocurrencies are encrypted to ensure security of each transactions. But on top of that, all transactions in the Bitcoin network are recorded on both public and private ledgers that are independently hosted all throughout the webspace.

This means that when things go wrong (for example, if the recipient did not receive any payment, or the bitcoin you sent got lost somewhere during the transaction), we can rely on these ledgers to validate each transaction.

I heard that Bitcoins mining from the internet can get me free Bitcoins. Is this true?

Well, yes that’s true. But you have to take this with a grain of salt. It’s not really free, since you have to spend money and time to get your free bitcoin. But the good thing here is that anyone with access to the internet and suitable hardware can participate in mining.

Just like real gold, that can be mined and is limited in supply, Bitcoin kinda works the same. You’ll also need mining tools and spend a bit of your own resources to mine Bitcoins, just as with mining gold.

Every ten minutes or so mining computers collect a few hundred pending bitcoin transactions (a “block”) and turn them into a mathematical puzzle. The miner who finds the solution to the puzzle gets 25 bitcoins as a reward, but only after another 99 blocks have been added to the ledger.

There are only a total of 21 million bitcoins that can ever be mined, regardless of demand. At first when bitcoin was a new technology, it was easy to mine hundreds of bitcoins (the “gold rush” period). But as more and more people learn about bitcoin and start to mine, and as availability of bitcoins decrease, bitcoin mining is now getting harder and harder and more expensive each day. It is estimated that all bitcoins will be mined by the year 2140, after which all bitcoins will just be available for sale or trade.

Why is bitcoin mining expensive, anyway? Because it takes a sophisticated computer (bitcoin mining hardware) that chomps on electricity to be able mine just a few. Anyone with internet access can mine bitcoins, but unless you have access to free (or extremely cheap) electricity, mining bitcoins might not be that profitable.

Want to know how easy or hard it is to mine Bitcoins? If you’ve got 10 minutes to spare, I highly suggest you see below short clip about the life inside a secret Chinese bitcoin mine.

That is the case of bitcoin mining for now, but if in the future a new technology is developed for the efficient mining of bitcoins, then by all means, sign me in!

What are the PROs and CONs of Bitcoins?

Let’s start with the PROs:

  • You can transact anonymously without any government institution mingling with your business
  • It’s convenient. A smartphone/computer and internet access is all you need, and no need to verify identity which causes a lot of hassles.
  • It’s transparent. Your transactions are seen and validated in public ledgers, but the good thing is that your personal information is not included in the ledger or seen by anyone.
  • Lower fees (or none at all).

And then the CONs:

  • Bitcoin is very volatile – prices of bitcoin is hard to predict, and it can rise or drop dramatically, many times in a day.
  • It’s risky, especially since it’s not regulated by a government institution which can ultimately choose to make it illegal.
  • Still not widely accepted, and still in its infancy stages

What is the Future of Bitcoin?

Bitcoin is still a baby when we look at the financial industry as a whole, so it is safe to say that its future is largely debatable, if it will stay for good, or if it will simply vanish into history’s “fail” list.

There are naysayers, for sure, but there are early adopters as well who will bet their lives on the success of Bitcoin.

But you know what? We cannot possibly predict the success of Bitcoin and other cryptocurrencies (like Altcoins – alternative coins to bitcoin, e.g. Ethereum, Litecoin, etc.) that came after it.

But one thing we can be sure about is that the future of Bitcoin lies completely in our hands. How, you ask?

If we use Bitcoins widely in our day to day transactions much like how we would our local currencies, then Bitcoin is likely to stay. You see, it needs to be widely used in order for it to succeed.

Currently, Bitcoins are used mostly for trading with other currencies.  It’s still in a stage where it’s still a “fad” that spectators gamble on. Bitcoins are notorious for being volatile, too; today it might be valued too high, but the next day it could drop in a snap. But if you’ll look at its historical performance, we can say that the value of Bitcoin only grows in time despite its sudden drops.

Bitcoin Chart 2010 to June 2017

This chart shows that despite its sudden drops, Bitcoin goes strong over time. Chart from 2010-2017, via CoinDesk.

As I’ve said above, although Bitcoin actually grows in value over time (could be just because it is a fad or supply and demand influences, or for some other reason), one thing that’ll actually make Bitcoin stay for good is if we use it widely in every day transactions. This will dictate the future of Bitcoins.

Fortunately for Bitcoin, its massive following has sparked new startups like Purse that create platforms to allow average users to actually use bitcoins to buy and sell stuff and services online. Also, physical stores that accept bitcoin and bitcoin ATMs have been popping up in major cities in the past few years, only leading more people getting themselves their own share of bitcoins, upping its value even more.

Bitcoin Transaction

If we use Bitcoins to buy something as unassuming as gumballs, then the future of Bitcoin is brighter. via Giphy

Stay awesome,

FRUSTRATEDBILLIONAIRE

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