What if you have trouble understanding modern computing? And what if the concepts of currency and currency exchange confuse you? Then I have a topic that will truly befuddle the heck out of you: the digital currency Bitcoin.
Bitcoin, much like 5G, is one of those terms that many of us throw around without really understanding. We know that we should probably be talking about it, so the word escapes our mouths from time to time. Such occurrences are usually followed by a short pang of anxiety as we hope that no one asks us a deeper-level question. In any event, here is a brief primer, designed for those who, as above, find technology and finance to be sources of stress.
The Concepts
Bitcoin is the best-known digital currency. The basic concept of a digital currency involves the idea that humans collectively accept certain items as valid currency. These items are assigned a given value, whether or not the items in and of themselves really have any intrinsic value. Examples over time have included stones, gold, paper money, etc. In a digital era, a digital asset can become such an item.
A digital currency can also be called a cryptocurrency, as the use of cryptography is key to protecting the security of transactions. Cryptography is a method of protecting information and communication through codes, ensuring that only the intended senders and recipients can access and understand the information. How exactly this concept works at a mathematical and computational level is well beyond the cerebral capabilities of ComposeMD.
In the case of Bitcoin, a specific technology called blockchain technology, which uses cryptographic concepts, plays a critical role in tracking transactions. In the simplest of all terms, the blockchain is a digital public ledger of all bitcoin transactions ever completed. This data is accessible to all users and stored in multiple locations (not one central location.) The chain of information cannot be altered without the permission of the majority of users.
The blockchain technology thus allows for the decentralization of currency. In other words, no central bank or other authority is necessary for the system to function.
The Specifics
How did Bitcoin even come into existence? An anonymous entity working under the name of Satoshi Nakamoto released the open-source software in 2008/2009. Bitcoins are “mined” much in the way that gold is mined, though in the case of Bitcoin, the “mining” is performed using complex computational calculations to receive new bitcoins.
The protocol allows for the mining of only 21 million bitcoins, at which time no further bitcoins can enter circulation. Leading up to that point, the number of bitcoins issued is halved every four years. Furthermore, the complexity of the calculations required to mine bitcoins becomes progressively more difficult. In fact, even though anyone could initially mine for bitcoins, the computing power required at this point is massive, limiting mining to large consortiums and companies. A significant amount of energy is required to cool the computers, raising concern about Bitcoin mining’s contribution to climate change!
The last bitcoin is expected to be mined in 2140. As of this writing, about 18.5 million bitcoins have been mined.
The Day-to-Day
All of the above suggests that Bitcoin is secure (thanks to cryptography), free from government manipulation (due to decentralization), and scarce (thanks to the way the protocol was written). So far so good when it comes to currency. But obviously, downsides above and beyond the effect of mining on climate change must exist. What are they?
First, given the relative novelty of the concept, significant uncertainty exists regarding its value, and price volatility has been immense. Initially trading for pennies, the price of one bitcoin rose to almost $20,000 in 2017, only to drop to less than $3500 almost one year later. Since then, fluctuations have persisted, though the general price trend has been upward.
Second, the overall future of Bitcoin remains somewhat unclear. As the number of transactions using Bitcoin increases, congestion on the network (blockchain) increases, driving transaction fees upward. (How the fees are calculated and where the fees go is another source of confusion for the non-techy types.) In fact, whether the blockchain can be scaled to handle increased volumes remains a long-term concern.
With this knowledge in hand, if you’re sufficiently intrigued, bitcoins can be purchased on exchanges, with the purchased bitcoins then being stored in a previously downloaded bitcoin wallet. Given the high price of one bitcoin, it is possible to buy fractions of one bitcoin.
Bitcoin is now accepted by certain businesses as a valid method of payment. Again, fractions of a bitcoin can obviously be used.
As a final point, Bitcoin is now just one of many cryptocurrencies in existence.
Hopefully, this primer has helped. If it has confused you even more, at least I feel better that I’m not the only one.
