Bitcoin and other cryptocurrencies are cryptic to say the least. Some people consider bitcoin a currency, others an investment and still others a store of value. Even government agencies can’t agree on what bitcoin truly is. The IRS treats it as property, the Securities and Exchange Commission considers it a security, while the Financial Crimes Enforcement Network says it’s a currency.
All that confusion makes bitcoin a volatile and uncertain investment. It doesn’t help that cryptocurrencies are the Wild West for investments because they’re virtually unregulated. No central authority, such as a government or central bank, regulates or controls bitcoin, and like all revolutionary new ideas, it could evolve once the world discovers what it is and what it might mean for the future of financial transactions.
What Is Bitcoin?
There is no physical coin attached to the bitcoin. It exists only on the Internet where bitcoin uses its network to enable direct global transfers between people so no intermediary can act as a gatekeeper between a bank or PayPal customers and their funds. Does not work on “You have complete control over your money,” says Spencer Bogart, a partner at Blockchain Capital in San Francisco, a venture capital firm that invests in blockchain-driven technology. You can hear the bitcoin being compared to digital cash because you can store it and send it without the bank as you would cash.
What Is Blockchain?
Blockchain is one of the reasons behind the Bitcoin craze. It is a global accounting ledger that records all bitcoin transactions. Anyone can view it with the appropriate software, called the Bitcoin Protocol, which is open source, meaning free to use.
Think of the bitcoin protocol as a language spoken by the bitcoin network. Any computer that speaks the language can join the network, and any computer can be taught the language for free. Computers that speak bitcoin protocols create bitcoin networks. When Alice sends Chapter 10 bitcoins, Network Blockchain updates the ledger with the details of the exchange so that all network computers can see it.
San Diego-based Eric Aaron, chief executive officer of Realty Shares, says transparency makes the network secure. “Imagine the blockchain as a large Google sheet, a copy of which everyone has on their computer,” he says. “If there is a duplicate or invalid cell, everyone will see it.”
How Bitcoin Transactions Work
When you buy bitcoin, you are effectively buying a password to a unique coin, Bogart says. Each bitcoin is a combination of a public and private key, similar to a username and password.
The public key is like your address, telling people where they can send you bitcoins. The private key is a 64-character password to a particular bitcoin. No one but you will ever see your private key. It’s like the key to a locked mailbox. As long as people know your public key, they can send you letters, but only the person with your private key can access those letters.
The two keys are mathematically intertwined, just as a person attaches to their DNA. “We can take a DNA sample without knowing who that person is, but he’s probably the only one who can make that kind of DNA,” Bogart said. “Similarly, we may have a public key and may not know what a private key is, but if someone signs a message with a private key, we can confirm that it is a public key. Is its counterpart. ”
Your private key acts as your digital signature. Catalini says that when you send bitcoins, you are basically writing a digital contract that you sign with your private key to confirm that you own the funds and you give them.
What Is Bitcoin Mining?
Bitcoin miners are people who have computers on a bitcoin network, called mining nodes, that run specialized, open source software. Anyone can set up a mining computer with this software, but as mining becomes increasingly competitive, these computers require faster and faster hardware to maintain.
Miners play a key role in clearing bitcoin transactions and reconciling them across the globe, Catalini says. They verify the sender has the funds available to send and isn’t trying to “double-spend,” or send the same bitcoin, to two users at once.
Where Do Bitcoins Come From?
When a miner solves a math problem, the protocol allows the person behind the computer to retrieve a predetermined number of new bitcoins on the ledger. One way to think about mining is to have a group of volunteers who contribute to the bitcoin network’s knowledge base and then be rewarded with bitcoins for their work, says Robert Hockett, Cornell Law. Edward Cornell, a law professor at the school and former legal adviser to the Federal Reserve Bank of New York and the International Monetary Fund.
The network also reduces the number of coins miners are rewarded over time. About every four years, or the length of time it takes to generate 210,000 blocks, the reward is cut in half. At that rate, we’ll reach the 21 million bitcoin limit (the maximum number of bitcoins that can ever be created) by approximately the year 2140.
How to Buy Bitcoins
You can buy fractional bitcoins out to eight decimal places. The smallest possible unit, 0.00000001, is called a satoshi after Satoshi Nakamoto, the pseudonym of bitcoin’s inventor. Other common units are one-one thousandth, called a milli, and one-one millionth, called a bit.
After creating an account and linking it to your bank or credit or debit card, you can place an order and Coinbase will fill it for you. This convenience comes at a fee, however, which varies depending on the size of your transaction.