If Bitcoin is the future of money, then it stands to reason that if money changes, so will everything else.
Alas, a proverbial idiot’s guide to Bitcoin.
The first thing you want to know about bitcoin is to avoid wasting your time answering the question ‘how did it start?’ The identity of bitcoin’s founder is a rubik’s cube of mysteries. Read about Satoshi Nakamoto, and “his” story begins to read like one part Jason Bourne, and two parts Krampus.
It’s important to highlight Satoshi Nakamoto’s unicorn-like reputation because when you study so called “candidates” for the real Satoshi Nakamoto, the philosophy behind the technology stays the same even when the names drastically differ. Bitcoin, and its precursor technologies, were designed for decentralized currency.
The idea behind bitcoin (or cryptocurrency) was to solve the problem of financial babysitting. Bitcoin was made to transfer currency between buyers and sellers rather than have banks and clearing houses inflate fees between parties. Such a system would not require prerequisites or limits, the way a bank does. Meanwhile, the “blockchain” – a critical aspect of bitcoin – is a digital record keeper managed in a peer to peer network that prevents modification of data, and confirms each legal transaction or payment. This is important because it creates a public ledger that doesn’t require a third party, and isn’t vulnerable to double-spending.
For a simpler, but fun explanation in graphic form, the Guardian has you covered.
How exactly does the technology, a hive of code and scripts, keep the transfer of money going smoothly while replacing the way things have always been done?
This is all done through mining – a process that looks and sounds closer to actual mining than you’d suspect for such a digital system; the miners have to physically replace parts and gadgets of their one thousand servers (a costly and exhaustive process), with can cost $80,000 in electric bills each month, and requires massive extractor fans to keep the servers from (literally) blowing up. Like a game of Jeopardy, each machine races to solve various math problems first. The first machine to solve each problem wins 12.5 bitcoins. Each machine branches out over time for more problem solving, every ten minutes, hopefully more bitcoins, and a ultimately, a stronger network.
Specialized computers run bitcoin’s unique software. The miners who oversee and manage the process are paid in bitcoins themselves. However, the incentive for miners is more than just bitcoin payment, but contributing to the stability of the system itself. Want a closer, real life look at this process up close?
All of these servers provide the structure for bitcoin’s network. Restaurants in Japan have been taking bitcoins since 2013. A small town in Switzerland has even replaced its ATM’s for bitcoin machines that print out a code for your bitcoin equivalent in currency.
A single bitcoin is worth $4,000. Luckily, a single bitcoin isn’t the same as using a $100 dollar bill to pay for a bag of doritos at the local gas station. They can be divided into one hundred million units. And they can be exchanged in person, linked to your bank accounts, or the private cryptography key can be protected from hackers with an actual ring on your finger.
The value of each bitcoin has more in common with a firecracker than a piece of copper. If you bought $27 of bitcoin in 2009, in 2015 it would have been worth $886,000. $5 of bitcoin bought in 2010 would make you $4.4M richer.
So what’s the catch?
Bitcoin is extremely volatile. In January, bitcoin lost $3B in market value in 40 minutes. A single response to a text message “from” Verizon cost one man $8,000. As recently as May this year, bitcoin dropped 30 percent. And that’s not even counting the scandals.
Nor is it counting China’s plans to stop the exchange of trading of cryptocurrencies, which caused Bitcoin to drop 20 percent.
In addition, bitcoin is merely one type of cryptocurrency. Monero, another type of cryptocurrency, began to outpace bitcoin 27-fold in January. Why? Because it was becoming the currency of choice for drug dealers. AlphaBay, an online darknet market, enlisted Monero so that users could buy and sell everything from marijuana, heroine, handguns, credit cards, and cocaine, to stolen Uber accounts.
Why would drug dealers use Monero over bitcoin? Because Monero uses a different script than bitcoin, bundling transactions together so that they’re harder to trace, and fully anonymous. Another cryptocurrency, Zcash, boasts privacy that is mathematically impossible to breach.
A brave new world, indeed.
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