So what exactly is a Bitcoin?
In its simplest form,
a Bitcoin is a peer-to-peer digital currency. Unlike most currencies which we
are accustomed to using, like the Canadian or American dollar, Bitcoin’s aren’t
regulated or even backed by any formal central authority. Rather, Bitcoin’s are
based on a concept which was introduced by an anonymous developer known as
Satoshi Nakamoto and is based on open-source cryptographic protocol. The best
way to explain this fancy string of words is that the code used to create
Bitcoins is widely accessible throughout the internet (providing for use on
just about every network) and it is also heavily encrypted to ensure user security.
Bitcoin coding consists of a unique address which contains 33 random numbers
and letters. Each Bitcoin address also contains 3 components: a balance (each
Bitcoin is divisible up until 8 decimal spaces), a public address (used to
clarify the destination when sending Bitcoins), and a private key (this is like
a digital signature to validate transactions which is also kept private by the
owner).
What makes Bitcoins so
interesting is their simplicity. Transferring Bitcoins is as easy as sending an
email and the best part is there is no need for a messy financial institution to
get involved. So, right there you eliminate the need for a bank account, financial
institution compatibility, and most of all those costly transaction fees. The
truth of the matter is all you need to buy and trade Bitcoins, is a Bitcoin
wallet for which there are plenty of free options to pick from. You can even
purchase physical Bitcoins which have their address printed on a certificate or
even a special tamper proof coin. However, these are more or less to give
people a greater sense of worth because the online address is actually the most
important and valuable part.
So how exactly are Bitcoins created and
distributed?
Well this is the part
which I sort of have a hard time understanding, so please note that this is my
best attempt at explaining how Bitcoins are created in an easy and relatable
manner (Please have mercy on my explanation). Given the Bitcoin proposal lacks
the infrastructure that most financial institutions have (I.E. multiple
servers, as well as teams of experts monitoring, watching, and coding), they
required the next best thing which was a network of willing individuals who
could contribute their resources and computers to help keep the operation
running. The most important aspect of keeping the operation running requires
the constant documenting and maintaining of the system’s ledger, which tracks
all Bitcoin transactions around the world. So, what better way to get people
involved with running the Bitcoin Empire than by rewarding them and their
computers with the opportunity to cash in on the Bitcoin craze. This is the
basic concept behind mining Bitcoins. Essential miners provide their computers
as part of the network and infrastructure which allows for the ledger to
properly document transactions, and in the process they receive a small Bitcoin
transaction fee as well as the opportunity to receive newly minted Bitcoins. It’s
also important to know that part of the Bitcoin protocol is to issue a steady
flow of Bitcoins into the market until 2140 when the system will be at its
maximum of 21 million Bitcoins. This helps legitimize the procedure by: feeding
Bitcoins into the system, increasing the perceived value in establishing a
limited supply, and rewarding miners for helping form a makeshift infrastructure;
talk about synergies. But just before you decide to take out your pickaxe to start
mining your own Bitcoins; it’s important to note that since its inception,
mining Bitcoins has become increasingly difficult. In fact, today the only
viable way to get any mining action is to join a group of miners and to mine as
a network and share the rewards amongst each other. But don’t let that
discourage you; given the volatility on this new currency maybe it only takes a
few Bitcoins over time to make a huge gain in the future. Which brings me to my
next point, what are these things worth anyways?
How valuable are these things?
So, this is where the
world draws a line in the sand and separates into two groups which can’t seem
to get along. On one side there are the people who see Bitcoins as a bubble.
Given the entire infrastructure is not properly regulated or even backed by any
central authority, this group is very quick to dismiss the value of Bitcoins
today as over inflated hype which will eventually hit critical mass and pop.
Furthermore, this group is also very quick to dismiss Bitcoins due to its shady
nature of requiring the online community to mint currency, as well as its confidential
codes which allows users to anonymously purchase a multitude of illegal
services online such as drugs, money laundering, and prostitution. On the other
side of the fence holds the believers. This group wholeheartedly believes in
the system’s infrastructure to be a viable economic model. Moreover, this group
also believes that given Bitcoins are a simple currency which has been widely
adopted around the world in a relatively short time, it stands to succeed in
the long run.
No matter what side of
the fence you stand on one thing is for sure, Bitcoin prices over the past year
have been as unpredictable as the U.S government agreeing on a budget. When the
program was first implemented back in 2009, people could have easily bought and
sold whole Bitcoins for as low as a nickel a piece. Now the price for Bitcoins
has been jumping back and for the between $100 and $200, as a consequence of
different press releases it’s increasingly difficult to gauge whether things
are going well or if the bubble is about to pop.
I hope in reading this
week’s post you have been able to gain a basic understanding of Bitcoins. While
the jury is still out as to whether or not Bitcoins are here to stay, I for one
look forward to reading the story as it plays out.
Until next time, I remain your friendly blogger,
Jon
