How does Bitcoin work? Feeling a bit lost when the conversation turns to cryptocurrency? Our correspondent Julie Chang Murphy is on the case. She’s summarized the basic facts and the key issues about cryptocurrency in plain English. We’re here to help clear the fog around this topic. Here’s what you need to know about cryptocurrency right now.
What You Need to Know About Cryptocurrency
Dazed and confused about cryptocurrency? Heard the word Bitcoin but have no idea what it really means or how it works? No worries, dear reader. We were in the same boat, so we decided to do the work of understanding the basics. So now, we can walk you through the key facts and summarize what you need to know about Bitcoin and the broader topic of cryptocurrency right now.
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[/white_box]How does Bitcoin work? Skimming this won’t give you a Ph.D in the subject. But you’ll be able to keep up with the conversation. We promise.
we begin with Tales from the Crypt
When I first heard about cryptocurrency several years ago, I thought it was solely in the purview of hackers and other shady criminals. The only person I knew who owned any Bitcoin was a friend whom I had already suspected was some kind of shadowy government operative. Two cell phones, two passports, always traveling to Malawi and Liberia to advise on “natural resource management” AND he owns virtual money? Total spy.
The story of lost Bitcoin is practically the stuff of urban legend. Just like someone knows someone who profited millions by buying and selling advantageous website domain names, we’ve all heard stories of early investors in Bitcoin who have lost staggering amounts of money because their hard drive crashed or their spouse threw away some passcodes scribbled on a post-it note.
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the basic facts about cryptocurrency
Many of us are aware of these stories but still don’t comprehend how cryptocurrency works and why anyone would want to buy into this nebulous portal of currency.
Words and phrases like “Dark Web”, “blockchain”, “mining” and “private keys” are usually mentioned in the same sentence. And one can’t help but imagine some kind of old-school Nintendo video game. Perhaps unsurprisingly, the majority of owners in Bitcoin are in the 18-34 demographic, out of an estimated total of 13 million holders.
If you’ve found yourself knitting your brows in confusion trying to understand cryptocurrency, or figuring out the difference between Bitcoin, Ethereum, Lightcoin and Ripple, this piece is for you. Here’s what you need to know about cryptocurrency to be able to contribute to the conversation at the next cocktail party. Just be warned: your friends might end up suspecting you’re an international secret agent.
The basic facts about cryptocurrency.
what to know about cryptocurrency: Blockchain
Broadly defined, cryptocurrency is virtual or digital money which is given value, not by a bank or government, but through encrypted mathematical modeling called blockchain.
Blockchain is the backbone of this entire system. So we have to understand this incredibly advanced technology before moving on to the other basic facts about cryptocurrency.
Imagine a transparent square block.
Inside this block is an indecipherable series of numbers that represents a unique transaction. In regards to cryptocurrency, it reflects the information associated with any typical transaction: the buyer, seller, price, and time and place of purchase.
Why does it matter that the block is transparent?
An intrinsic quality of this technology is that there is no central authority. The encrypted information inside this block is public and visible to everyone. While at the same time being completely anonymous. The data in these blocks cannot be altered without the consensus of powerful computers that are running this system.
where does the chain come in?
Every time new transactions are made, they get bundled together to make another transparent square block. All of these blocks are secured and bound together with cryptographic principles known as the “chain.”
basically, blockchain = a ledger
This is all to illustrate that a blockchain is a techy term for what is essentially a ledger or database. And, in fact, the unprecedented security of blockchain has garnered the attention of healthcare, banking and government agencies as a way to ensure the integrity of its documents and services.
But in cryptocurrency, creating blockchain is monetized for profit.
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what to know about cryptocurrency: Mining
How does Bitcoin work? Let’s take a look. Bitcoin is arguably the most elegant and definitely the most popular application of blockchain.
Bitcoin is created through a process called “mining” where users with dedicated computer hardware are rewarded with coins by carrying out two tasks.
First, as part of the cryptocurrency ecosystem (the aforementioned “consensus of powerful computers”) they must validate 1MB worth of transactions which will end up forming a new block on the blockchain.
The second step to completing the blockchain is for the user to successfully generate a 64-digit hexadecimal number, known as a ‘hash.’ Unfortunately, the only feasible way to arrive at a hash matching the correct criteria is to simply calculate as many as possible and wait until a matching hash is generated.
The more powerful the hardware and setup, the more hashes-per-second. If a miner completes a block, as of the time of writing, they will be rewarded with 12.5 Bitcoin. In 2009, the reward was 50 Bitcoin. The number keeps halving as less and less Bitcoin become available.
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If you’re thinking of becoming a miner, it’s probably too late. The Gold Rush is over. You’ll be competing with organizations who have warehouses packed floor to ceiling with software trying to mine the next block 24/7. The odds of solving the mathematical model? 1 in 7 trillion. They need cooling generators to execute these operations. Just saying.
How does Bitcoin work?
What exactly are you buying when you purchase Bitcoin? Even if it’s just for bragging rights with your friends or work colleagues. You are purchasing an entry that will eventually form the 1MB worth of transaction data that goes into that imaginary transparent block. You are essentially buying a code for $10,329.70.
How does Bitcoin work?
Unlike the US dollar, which can be printed at will by our government, there is a finite number of Bitcoin – 21 million to be exact. Currently, 85% has already been mined (17,850,00 million) but as the algorithm continues on and the number of awarded bitcoins to miners keep dropping, it will be 2140 before the last Bitcoin is mined.
Bitcoin alternatives
We’d be remiss not to mention that Bitcoin is not the only cryptocurrency out there. There are almost 1,500 types of cryptocurrency, all using their own versions of blockchain technology. Some of the most popular ones include Litecoin, Ethereum, Ripple, ZCash, Dash and Monero.
the cryptocurrency marketplace of choice
The other element of what to know about cryptocurrency is how and where to transact with it. The most common platform to buy, sell and trade cryptocurrency is undoubtedly Coinbase. It has a user-friendly interface, e-wallet and mobile app.
Since 2012, Coinbase has served 30 million customers and exchanged $150 billion in cryptocurrency. It can be linked directly to your bank account. And all cryptocurrency stored in their servers are covered with an insurance policy just like a typical bank.
that’s what you need to know about cryptocurrency
Those are the important basic facts about cryptocurrency. As you can see, neither mining gold or mining (and understanding) cryptocurrency is not for the faint of heart. At least in the Wild, Wild West, they had cool boots!
What do you say? Are you in on this?
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Crediting her training as a cultural anthropologist at Wellesley College, Julie has immersed herself in various industries in the last 15 years including fashion design, event planning, fitness and even investigating police misconduct. Julie lives in NYC where she loves trying every ramen and dumpling restaurant with her husband and three children. She finds joy in bold prints, biographies of fierce women, kickboxing and spending way too long finding the perfect polish color to express her mood.
