How Does Bitcoin Work? And How You Can Get Involved

05/21/2019     Author: Billy Gray

You’ve no doubt heard countless stories about bitcoin. But how exactly does this revolutionary technology work? Check out all the information you need to know here.

 

Bitcoin has been all the rage for years now. It just won’t go away, it seems. Some consider it the future of global currency and are quick to invest their money into it. Others insist that it’s just a fad and that it will inevitably burst and that all its users will lose their money.

Bitcoin is certainly controversial, as well. The FBI have repeatedly seized bitcoin stashes from dark websites like Silk Road. This site in particular caught massive media attention and led many to believe that cryptocurrencies are inherently tied-up with buying drugs online.

The price of bitcoin surged in 2017, peaking at more than $19,000 for a single bitcoin (now the price is around $4,000). This peak grabbed the attention of a lot of people and turned plenty of investors in millionaires before the price plummeted. Nowadays, investors are banking on the fact that bitcoin will take off again, while critics assume that it’ll eventually be worthless.

You’ve probably already gathered this much, but you may still not be fully aware of what bitcoin actually is or how it works.

What is bitcoin?

Bitcoin is a cryptocurrency. This means that it’s a form of money that is stored in servers and not in the physical world. It doesn’t have any regulators, meaning it’s completely separate from government, banks, or any other third parties.

It was invented in 2009 by Satoshi Nakamoto in Japan, although many believe that this is in fact an alias for an individual or group of programmers based in North America or Europe. The real identity of Nakamoto remains unknown.

It was invented against a backdrop of the 2008 financial crisis and many advocates of cryptocurrency see it as an ideological alternative to the current banking system. That being said, the everyday user of bitcoin is probably a lot more interested in getting rich off the back of trading it than they are about overthrowing the global financial system.

Security

Of course, if you’ve got thousands of dollars holed up in a cryptocurrency, you want to know that it’s safe. Bitcoin requires you to have a 16 digit public key. This is like your credit card number and you’ll need it to make transactions. You also have a 36 digit private key. This is something you have to guard at all costs. If someone gets your private key, they can steal all your bitcoins. Think bank safety deposit boxes…

HOW TO BUY BITCOIN

To buy bitcoin, you simply go to a trade exchange. These are websites where you can buy and sell your bitcoin to other users at the current market value. In this way, it works very similar to the stock exchange.

There have been hacks of exchanges in the past, which has led many not to trust them. That being said, these hacks targeted the exchanges themselves and not the actual money of individuals. It’s like a bank getting robbed – your money isn’t taken, but the bank’s does.

HOW TO STORE BITCOIN

Keeping your bitcoins safe is obviously very important. Your bitcoins are stored in a digital wallet that is protected by heavy encryption. Even though wallets are very secure, most people still recommend that you don’t store the bulk of your bitcoin here. It’s similar to saying “you wouldn’t store $20,000 in your real wallet.”

There are other ways to store your bitcoin. You can use a ‘hard wallet’ which is like a USB that isn’t connected to any network and is thus impossible to hack. There have been stories of people losing their hard wallets and with them losing millions of dollars’ worth of bitcoin. So be careful to keep it somewhere safe…

You can keep your bitcoin on the exchanges as well, although, as we’ve seen, these are the area of the bitcoin world most prone to being hacked. Consider it an investment with a little added risk.

HOW TO USE BITCOIN

Once you’ve got your bitcoins, you can spend them in many ways. A lot of people choose to just hold on to them and trade them as the value fluctuates. This isn’t the worst idea in the world, but if you’re more of a spender than a saver, then there are plenty of ways to spend your goods. It’s worth bearing in mind that the first ever bitcoin transaction was 10,000 bitcoins for two Papa John’s pizzas. In today’s value, that means that that person basically spend $40 million on two pizzas… God knows what happened to those bitcoins.

Nowadays, you can spend your bitcoins in cafes, in the Xbox Store, on Amazon, Expedia, and more. There are some stores dedicated to helping you spend your bitcoin and the trend is growing by the day.

While you can’t currently expect to do your weekly shop in bitcoin, who knows what the future might hold?

The ceiling

When bitcoin was invented, there was a limit set on the amount of bitcoins that could ever be created. This limit was 21,000,000. Currently, there are around 18 million in circulation. That being said, the bitcoin can be infinitely denominated, meaning you could simply trade smaller fractions of bitcoins as their value increases. That makes the limit pretty much arbitrary.

Things to know about bitcoin

Now that you’re a little more clued up on bitcoin, there are a few things you should bear in mind about the currency.

ALL TRANSACTIONS ARE FINAL: none can be reversed and there is no way of insuring you because there are no third-party regulators. That means you need to know that the money your about to spend is actually going to where you want it to go.

IT’S ANONYMOUS: This is why it is used by criminals to purchase drugs and firearms. Addresses aren’t connected to real identities making it very hard to track.

DON’T LOSE YOUR PRIVATE KEY: There are stories of people getting locked out of their accounts that contained millions of dollars’ worth of bitcoin. Don’t be like them…

IT’S SECURE: Bitcoin exchanges have been hacked. The most famous was in Japan where $350 million worth of bitcoin disappeared from an exchange. That being said, user’s wallets are very secure.

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