What is Bitcoin?

What is Bitcoin?

Bitcoin is a protocol for sending value over a peer-to-peer network. Currency is one application built on top of Bitcoin, so let’s start there!

Simply put, Bitcoin is a digital currency. It can be used just like the U.S. dollar to buy and sell goods from an expanding list of retailers, including Microsoft, Expedia, and Overstock.

bitcoin, newegg, payment, checkout

Bitcoin checkout on Newegg

But it’s applications go far beyond “regular” currency. Here’s why:

  1. Bitcoin is decentralized, meaning that no single entity controls or issues itBecause it is not controlled by a single entity, Bitcoin does not require trust in a state economy, a group of politicians, or even a country.
  2. Like gold, Bitcoin is limited. Unlike the U.S. Dollar or Venezuelan Bolivar, Bitcoin cannot be devalued by printing more currency, making it immune to hyperinflation.
  3. Bitcoin transactions are immutable – meaning that funds cannot be frozen and transactions cannot be reversed.

For these reasons, Bitcoin has been dubbed “Digital Gold“, and is increasingly being viewed as a store of value.

How does Bitcoin work?

Bitcoin pioneered a powerful new technology called blockchain. A blockchain is a continuously growing list of records containing transactions. It can be thought of as a bank ledger, however instead of a single bank keeping track of transactions, a peer-to-peer (P2P) network of users verifies the accuracy of the ledger. This technology removes the need to rely on a company to keep truthful records.

Bitcoin, Blockchain, timestamp

Simplified Bitcoin Blockchain

Many would argue that Bitcoin is the only true blockchain, since decentralization and immutability are the two main characteristics of Blockchain technology. But companies like IBM, Wal-Mart, and Microsoft and many more are starting to note the potential of blockchain, are are attempting to incorporate aspects into their own businesses. Blockchain does not rely on centralized servers that can be hacked. Blockchain is an immutable, time-stamped and verified ledger of information, Good-bye fake news!

How does Bitcoin have value?

Just like the U.S. Dollar, Bitcoin has value because people think it has value. And these days, people agree that Bitcoin has a lot of value. As of November 2017, Bitcoin has a market capitalization (# of coins * value of each coin) of $122 Billion.  That’s over $7,300 per coin, with 16.5 million Bitcoin (or BTC) in existence.

Bitcoin is not backed by the full faith and credit of any government, but that’s kind of the point. Bitcoin also does not diminish in value due to political instability. In fact, many view Bitcoin as a hedge to political and global market turmoil. Bitcoin saw a significant increase in value when the banking system in Cyprus collapsed in 2013. Bitcoin surged during Brexit as the Pound-Sterling collapsed. Bitcoin is surging again as countries like Venezuela experience hyper-inflation. In fact, many Venezuelans have turned to Bitcoin as they can only trade their Bolivars at black-market rates which are much worse than the government-sponsored exchange rate that (surprise!) only the President and his friends have access to.

Next: How Do You Buy Bitcoin?

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