Bitcoin’s massive leaps and volatile swings have brought a lot of new people to the technology. We’ll explain what Bitcoin is, how Bitcoin works, how Bitcoin wallets work, and throw a mention in for getting free Bitcoins through faucets.
What Is Bitcoin?
In 2013, Bryan penned his first Bitcoin primer, but these are the things we’ve found most people new to Bitcoin want to know today:
- Bitcoin is a cryptocurrency, meaning a digital currency that uses cryptography—essentially complex math equations—to ensure each transaction happens only once.
- Bitcoin’s value is predicated primarily on three things:
- Bitcoin’s transparency means trust isn’t required for the system to work. In the parlance of the industry, this means Bitcoin is trustless.
- There is a finite, known quantity of Bitcoins that will be created—21 million of them—making it a lot like a commodity.
- Speculation on how Bitcoin will be used for commercial transactions in the future.
- Bitcoins are stored in digital wallets, including online wallets.
- Bitcoin is decentralized, meaning no single party owns or controls Bitcoin.
- Everyone can see every transaction ever made on the Bitcoin network.
- Bitcoin is not backed by tangible assets, nor is it backed (or controlled) by a government. Bitcoin has been increasingly regulated, however, which makes it less attractive to many hardcore Bitcoin fans and more attractive to mainstream businesses and financial institutions.
Yeah, But What Is Bitcoin?
Think of Bitcoin as a digital commodity. It’s sort of like gold or diamonds that can be traded for things of value, like dollars. That’s not technically correct, but it’s close enough that it gets us in the right ballpark so we can have a conversation.
The principles behind Bitcoin are transactional in nature. This technology allows anyone to send Bitcoins to anyone else over the internet—with no bank or wire service required. You don’t even need a service like PayPal’s VenMo or Apple Pay Cash, both of which rely on centralized systems controlled by a third party (PayPal and Apple, in this case). All you need is Bitcoins in a wallet and the address of your recipient, and you can send your Bitcoins to another person, or to a business that accepts Bitcoin.
That’s why Bitcoin was developed, but Bitcoin’s huge gains in the last few months are more speculative in nature. That speculation has dramatically increased interest in Bitcoin.
Like gold, Bitcoin can be mined and “found.” To be frank, Bitcoin mining isn’t viable for mere mortals these days. Instead, if you’re wanting to get into Bitcoins, you’ll likely buy it from a friend or on an exchange. From a speculative stance, the idea is to acquire it at a cost that is less than that for which you eventually sell it.
This Is Not Investment Advice
Let’s stop right there: we’re not advising you to buy Bitcoin. As we write this article, Bitcoin is trading on Coinbase at $26,865.96, and over the extended Christmas weekend, it came close to $28,000. And keep in mind that Bitcoin began 2020 at just over $7,000, as shown in the year-long chart below.
That’s insane volatility. And worse, Bitcoin’s current price might be a new peak, or it might be at the bottom of a huge climb to the moon. It could crash at any time. Or not. In 5 years, it could be worth $100,000 or zero. Or anywhere in between. Bitcoin’s past is no guarantee of its future. And while we aren’t offering investment advice to anyone, an investing/gambling foundation is to never risk more than you’re comfortable losing.
How Bitcoin Works
Like gold in ages past, Bitcoin can be traded or used to purchase things. The big difference is that while gold is something you can hold in your hand, Bitcoin only exists in the digital realm. Bitcoin is a type of cryptocurrency. It uses cryptography to secure each and every transaction, ensuring that you can only spend each of your Bitcoins once.
Let’s look at it like another kind of digital asset, an MP3 of a song. We could sent that MP3 file to everyone reading this article and you would all have that same file. That’s fine for songs, but that’s not so great with Bitcoins. If we could send everyone the same Bitcoin, it would have no value.
To solve that, every time a Bitcoin is exchanged, the transaction needs to be confirmed by other computers. In fact, it needs to be confirmed up to 100 times using pools of dedicated hardware “mining” devices that are essentially specialized, dedicated computers. Once enough of those unrelated computers agree that the transaction is correct, then it’s considered confirmed and that Bitcoin we had is no longer ours, it’s yours.
And these computers are all owned by different people. You could even own one if you wanted (though it’s difficult to turn a profit mining these days). There’s no government involved, no one entity that controls everything, it’s all distributed in a peer-to-peer style like bittorrent.
For the record, no, we’re not giving you a Bitcoin just for reading this. We appreciate you, dear reader, but there are limits to even our love.
[Update: this article has been updated to reflect changes in Bitcoin in 2020 – Editor]
Next: Bitcoin Is a Commodity, Bitcoin Wallets, and Bitcoin Faucets