What it is, why it matters & what it means to you.
By Hannah Massen
Bitcoin: a shady form of payment or the future of finance? We’re answering all of your questions about this cryptocurrency below.
First things first: what is Bitcoin?
Bitcoin is a digital currency that was created by the mysterious and pseudonymous Satoshi Nakamoto in January 2009. Bitcoin offers the promise of lower transaction fees than traditional online payment methods and, unlike government-issued currencies, is not monitored by a centralized authority.
Like other cryptocurrencies, there are no physical Bitcoins, only balances kept on a public ledger that everyone has access to. Because they are not issued or backed by any banks or government, Bitcoin transactions are verified using a massive amount of computing power.
How does Bitcoin work?
Each Bitcoin (or BTC) is a file stored in a digital wallet on a computer or smartphone and is powered through a combination of peer-to-peer technology and software-driven cryptography. To understand how this works, it helps to know the following terms:
- Blockchain: Bitcoin is powered by an open-source code known as blockchain. Picture a collection of blocks (transactions) that are chained together using computer code, creating a permanent record of each transaction. Because this transaction record is public and is updated in real time, no one can cheat the system.
- Private and public keys: Remember how we said Bitcoins are stored in digital wallets? Each wallet contains a public key and a private key. The owner uses the private key to initiate and digitally sign transactions, while the public key is used to receive funds.
- Bitcoin miners: Miners are members of the peer-to-peer technology platform that Bitcoin is run on. Think of this community like the multiple writers who contribute to Wikipedia. Miners independently confirm transactions and are paid in Bitcoin for their efforts.
Wait – what was that about digital wallets?
A digital wallet is a secure storage system for online currencies. There are two types of digital wallets:
- Hot wallets: Digital currency is stored on a cloud-based system and is accessed through a computer browser.
- Cold wallets: An encrypted portable device (like a hard drive) that allows you to download and carry Bitcoins.
How can I buy Bitcoins, and how much do they cost?
Digital marketplaces called “Bitcoin exchanges” allow people to buy and sell Bitcoins using different currencies. Coinbase, Bitstamp, and Bitfinex are considered leading marketplaces, but they are able to be hacked.
If you do decide to buy Bitcoin, don’t make the mistake of assuming that one Bitcoin is worth one American dollar. The value of one Bitcoin has been over $57,000 and changes by the hour.
So, should I invest in Bitcoin?
Just like any investment, backing cryptocurrencies comes with pros and cons. Bitcoin offers the promise of secure financial transactions anytime, anywhere, with fewer fees. It also has high-growth potential, similar to that of stocks, and allows you to avoid financial or government intermediaries.
But, also like stocks, Bitcoin is subject to price volatility. Digital wallets and marketplaces also are vulnerable to hackers, which is particularly concerning because Bitcoin is not protected by The Securities Investor Protection Corporation (SIPC). If your money is stolen, there’s a good chance you won’t get it back.