A Beginner's Guide to Bitcoin
A fast guide to cryptocurrency's golden child.
The financial world can't stop talking about bitcoin. In recent weeks, the headlines of business journals and finance sections have covered everything from the importance of investing in bitcoin to how the bubble is about to burst (within days of bitcoin futures hitting the stock exchange). To anyone on the outside, those words make no sense.
But that doesn’t mean that bitcoin isn’t on the average American’s radar. Introduced in 2009, bitcoin is an anonymous cryptocurrency, or a form of currency that exists digitally through encryption. It was invented to be unhackable, untraceable, and safe for investors. The value started out insanely cheap and hit a bump in 2013 that took it to about $250 per bitcoin. Once bitcoin futures hit the CME Group, the price of bitcoin skyrocketed to nearly $20,000. Think of it this way: If you'd invested $100 on January 1, 2011, when one bitcoin was valued at .30 cents, those bitcoins could be worth around $5 million today.
So, at least for now, it’s not going away. Here's a quick rundown on what the hell bitcoin actually is.
How does bitcoin work?
Bitcoin is a cryptocurrency that is conducted on a public ledger, the "blockchain." Digitally transferred, it exists only online. Much like gold, it can have monetary value while also being a commodity, but it’s still its own currency. It is also decentralized and not managed by a single entity, but rather a group of people who process transactions, called miners. This means it is not subject to government regulations when traded or spent, and you don't need a bank to use it.
Explain this blockchain.
Miners are in charge of making sure bitcoin transactions made by users are recorded and legit. Simply put, they do this by grouping every new bitcoin transaction made during a set time frame into a block. Once a block is made, it is added to the chain, which is linked together with a complex cryptography. This chain of blocks is the public ledger, and its extreme complexity is what currently protects transactions.
Is bitcoin infinite?
No, at the maximum, the system is designed to top out at 21 million bitcoin. At that point, bitcoin will stop being released. Most people think that will be around the year 2140.
You see, miners don't build blocks just from the kindness in their hearts. When a miner builds a block, they also have to solve a series of complex math puzzles. If they can do it before any other miner, they unlock a predetermined amount of bitcoin that they can keep—a prize for being both smart and quick. The way this competition for bitcoin will last until 2140 is through “halving events.”
The first time bitcoin was mined, the founder, Satoshi Nakamoto, released 50 bitcoin, which he kept. Moving forward, when a miner completed a puzzle, he or she got 25 bitcoin. In the summer of 2016, that was halved again to 12.5 bitcoin. That amount will continue to be halved periodically until all 21 million bitcoin have been released.
Is it safe?
By the estimation of many bitcoin experts, that public ledger is pretty bulletproof. To change the ledger, you not only would have to harness a ton of computer power, but you’d also have to do it in very public space where thousands of other computers and users can see exactly what you’re doing. What one person or computer does affects the entire blockchain, and everyone can police the transactions.
So, should I invest? Why?
Currently, unless you're spending thousands of dollars to buy it in bulk, bitcoin is nothing more than a stock, though the inventors would hate to have it explained that way. In time, it could become a reasonable mean of purchasing goods and services—Japan accepts it now, legally. But for now, it's quite literally an investment. And if you're smart (or lucky) it can make you money, assuming the bubble doesn't burst.
How do I invest?
Just like any investment, it’s best to consult someone who is well-versed in making investments. But a good rule is to not invest any more than you’re willing to lose. Cryptocurrency can be volatile, growing and plummeting in terms of value every day. If you're still intrigued, there’s a number of apps you can download on your phone to get started investing, like Coinbase, Blockfolio, and Bitstamp. These apps are also "digital wallets" that store your bitcoin.
The most convenient and popular seems to be Coinbase. It’s an app that you can download on your phone and invest up to $750 a week. It’s secure, but then again, it garnered some buzzy headlines last week for insider trading.
Wait. Insider trading? Isn’t that the point of b—
Yeah, who knows. But Bitcoin CEO Roger Ver defended Coinbase and said that it’s not a call for further regulation, and then referenced a couple of economists who support insider trading.
People didn’t love that answer, but that’s the world you’re investing in. So, get your bitcoin and head to the Digital Wild West.