Without a doubt by now you’ve heard about this thing called Bitcoin. If you’re still wondering how it works, it’s time to take a few minutes to learn about it, as this new currency may very well come in handy in the future—and the future of alternative currencies like Bitcoin is looking pretty bright.
What Is Bitcoin And How is it Generated?
Bitcoin is a form of currency which is similar to the former US “Gold Standard”, but it’s directly tied to the Internet and is the world’s first free market, decentralized global currency. Bitcoins can be exchanged for other currencies, goods or services.
Essentially, Bitcoins are created out of “thin air”, but it’s a little more complex than that—an open-source computer mining system similar to a lottery yields a commodity similar to gold. Let’s break down the metaphors of lottery and gold in the context of Bitcoin.
“Lottery”, in this context, meaning that a computer trying to “find” bitcoins is trying to decipher a 64-byte number before anyone else on the Bitcoin mining network does. Each time the computer gets the 64-byte string correct before anyone else, a new block is created and 25 BTC (currently) is awarded to the miner or group of miners—groups are more popular now than ever.
“Gold”, again in this metaphorical context, meaning only 21,000,000 Bitcoins will ever be created just as only a certain amount of gold will ever be discovered on Earth. Because of this, Bitcoins work very differently from most other forms of currency. Bitcoins become worth more as time goes on (finite supply) vs. traditional currencies today which lose more value as time goes on (infinite supply; central banks can print money at their discretion, and they do). There are currently about 11.5 million Bitcoins in circulation, many believe that the value of Bitcoins will skyrocket once all 21 million have been mined.
Bitcoin Ownership As an Investment
As Bitcoins continue to be mined they begin to create more value since more and more people begin to own them. The longer you hold onto them, the more value they tend to take on as more and more people begin collecting them. This means that buying 5000 Bitcoins back in 2009 would cost you about $27; today, the same amount is worth $1.2 million (however, this number is subject to change as the market fluctuates).
People work hard for months or years to mine these things, investing time, hardware, and energy in the process. This is where the initial value of the currency is born, since time and money was used to create them.
It’s a lot like gold. As long as people trust that this currency has value, people will continue to invest in Bitcoin. Bitcoin is open-source software, so it has no central control with corrupt bankers and politicians, just people working for free to keep it running.
Alternative Currencies – The Answer to Ongoing Global Economic Problems?
Given all the problems in world economies, people are beginning to lose faith in conventional legal tender like the GBP and USD. Governments have demonstrated that they can seize your bank-accessible assets if necessary. With Bitcoin, this isn’t possible (generally speaking) as they do not have access to your funds. Your Bitcoin wallet is essentially your own bank. It’s similar to the idea of people stuffing cash into their mattresses, except this is a lot more profitable and accessible. The low transaction fees are also a great draw of Bitcoin, amounts worth millions of USD can be transferred for just a few cents (a fee of about 0.00001%).
What Can I Buy With Bitcoin?
Recently, a number of companies, including WordPress, OkCupid, Reddit and Humble Bundle, have begun to accept Bitcoins as a valid payment option. You can reasonably expect more to do some in the next couple of years.
Bitcoin is, however, more open to exploitation and speculation, due to the absence of any large exchanges where buyers and sellers can find each other, and from the lack of liquidity and a central monetary authority to make sure supply and demand are balanced.
The best way to gain knowledge and information on what Bitcoin is and how it works is to have a little dabble yourself; nothing too big, but if you dip your toes into the cryptocurrency pool and like what you find, it could change the way that you view money online.