By now, you’ve probably heard the term Bitcoin get thrown around recently. There are a few reasons this digital currency has received some mentions in the public eye—but what is it?
Bitcoin is worth having a basic understanding of. We’ll give you a quick, plain-English rundown so you can decide if it’s worth learning more about!
Like the dollar, the euro, or the krone, Bitcoin, known as a cryptocurrency, is an actual currency. A Bitcoin has an actual value (we’ll touch on this shortly) just like how a United States Dollar or a Euro has value. This means that Bitcoins can be used to buy products and services, provided that the vendor accepts Bitcoin as payment.
You probably first heard the term Bitcoin back in 2017, when the price of a single Bitcoin skyrocketed from a few hundred dollars to around $20,000 USD. That would be like having that lucky $2 bill in your wallet suddenly being worth a mortgage payment. Many people who had owned Bitcoin(s) suddenly found themselves quite a bit more affluent than they were before the cryptocurrency blew up.
We all sort of accept the value of money, despite it being a made-up concept. It helps that, collectively, society has simply accepted that a dollar is worth (more or less) a dollar. A lot of people will tell you that the US dollar, for example, is backed by gold. The reality is that the US dollar (and many other modern currencies) are backed by the government that issued it. This is referred to as fiat money. Fiat money tends to be less volatile for the overall economy. I’m no economist, so I don’t want to muddy the waters trying to tell you why—the point is that Bitcoin isn’t backed by a central authority like a bank or a nation. Instead, the currency tracks and manages itself—the currency itself contains its own history with every transaction it has been through.
Bitcoins are actually “mined.” Every single Bitcoin ever produced was created by computers that are processing complex math equations. For a few years, the high value of the Bitcoin actually caused shortages of high-end computing hardware and raised the demand of data centers across the globe. People and organizations would heavily invest in expensive computer equipment to churn out Bitcoins. As time goes on, however, the rate that a datacenter can churn out the Bitcoins has diminished. The more miners mining for Bitcoin, and the more Bitcoin mined, means the more computer processing it will take to result in more currency. The chances of a user making much of a return with just a consumer-grade computer or even a business server is pretty slim. Instead, the investment to start effectively mining for Bitcoin takes a pretty steep investment of hardware, and a whole lot of time and electricity. In fact, it’s estimated that the carbon footprint to simply maintain Bitcoin globally is about the same as the nation of New Zealand. Computational power and electricity go hand-in-hand, and it’s possible that we may see regulations in the future to ensure that any computing dedicated to virtual currencies is as green as possible.
So as you can see, Bitcoin has had a pretty sizable impact on the world, despite how strange of a concept it is.
The idea behind it is simple—Bitcoin is anonymous. Although all transactions are recorded and public, the identity of those involved aren’t revealed. You essentially set up a digital Bitcoin wallet that either exists on your local computer or in the cloud, and all of your transactions are tied to the wallet’s ID. This has caused Bitcoin to be used by people looking to buy drugs or other questionable products and services. That said, you can also buy white-picket fences at Home Depot, frozen yogurt at Whole Foods, or giant four-person bean bag chairs on Overstock, all with Bitcoin. It’s not used everywhere, but some establishments do accept it.
More than anything though, Bitcoin has essentially become its own little stock market for users to buy low and sell high, as the value of a Bitcoin ebbs and flows.
Anytime your money leaves your hands, there is going to be risk. Whether you are investing in stocks or ordering fries and a Sprite, there’s always some level of risk that you won’t get a return that’s equivalent to the value of your money (unless you like cold fries and flat Sprite).
Exchanging your money to Bitcoin has its own risks—the value of Bitcoin tends to shift quickly compared to other markets. Storing Bitcoin on your computer is risky because a hardware failure or virus could delete your money. Storing Bitcoin in the cloud is risky because it could be stolen. There have even been companies that offered cloud Bitcoin wallets that ran off with the money of all of their customers. Your Bitcoin money isn’t insured like your bank account is.
There are other virtual currencies out there—right now the one that’s making headlines is called Dogecoin (referring to a goofy well-circulated photo of a cute Shiba Inu lovingly named Doge, pronounced “dohj,” like the word dojo without the o at the end). Dogecoin’s value has recently skyrocketed, thanks to Elon Musk tweeting about it.
(Big exasperated sigh)
Yeah, cryptocurrencies are weird.
Do you have any stakes in Bitcoin, Dogecoin, or any other cryptocurrencies? Tell us your story! Be sure to check back to our blog every week for more!