Bitcoin Explained

 
 
 

By Andrew Leuciuc

Written Sun March 14, 2021

Updated 1:16 AM ET, Thur March 18, 2021

 

By now, almost everyone has heard of bitcoin, dogecoin, litecoin, and all other types of cryptocurrencies, but most people know close to nothing about what it really is or how it works. In fact, a survey conducted by CNBC found that more than 1 in 3 cryptocurrency investors know little to nothing about it. The sad reality is that many people haven’t done the proper research necessary prior to picking their investments. In this article, I hope to put into simple terms why the cryptocurrency market was created and how it functions.

At its simplest, cryptocurrency is an asset that people use as a medium of exchange--like real cash, but digital. While the idea of cryptocurrency isn’t new, actually making the product was extremely difficult and something computer scientists struggled with for decades. It gained more and more traction when the credit card was first introduced in the 1960s, as people wanted a non-traceable form of money on the internet. “Non-traceable” is a tricky and often misleading term when it’s associated with bitcoin. People portray the cryptocurrency as untraceable, but fail to realize that every bitcoin transaction that’s ever happened has been recorded and stored into a public ledger which anybody can view at any time. However, the components of Bitcoin (addresses, transactions, and private and public keys) are all read in text strings that don’t directly link to anybody’s personal identity.

In order to get a solid understanding of this seemingly complex market, it’s important to know what a blockchain is. At its core, a blockchain is a type of database, but it differs from the traditional databases most people know about. Most databases store information by rows, meaning that all data in a specific row are stored together. Blockchains, on the other hand, collect and store data as a group--in blocks--and the blocks are then chained together. This creates a new and interesting dynamic where all blockchains are databases, but not all databases are blockchains. Different information can be stored into blockchains, but its most common use is as a ledger for financial transactions, very similar to your typical everyday bank. Copies of the ledger are distributed among computers all over the world and are automatically updated with every transaction. Having a few people maintain the distributed ledger would be how most people think it’s kept up to speed, but part of what makes blockchain so unique is that it’s not one specific person's job to do the work. Instead, the system has a network of different people who volunteer to balance the ledgers and get paid in cryptocurrency. Contrary to the way a typical bank runs, blockchain makes everyone a part of the ledger. Sometimes called a distributed ledger, it gives multiple authenticity points for every transaction that has ever happened, which is a concept that’s never been developed before. 

This new database has been around since 1991, but it had no modern practical use until Bitcoin rolled around in 2009. Bitcoin was blockchains’ first trial run, with no regulations and no central authority. The crypto quickly took off, in large part due to the timing of its debut. In 2007, the housing market collapsed, and many people lost their homes, jobs, and life savings. These people were angry at the government and big banks for continually cheating the average American in exchange for a hefty profit, and Bitcoin was the perfect combination of ideas to battle those large corporations. In many ways, the value of Bitcoin is similar to the value of gold or silver: it comes from the trust of the people through their use of and belief in the crypto as a monetary value. Bitcoin and other respective cryptos are now invested into by companies and people trying to turn a profit in the stock market, and so far it’s been pretty easy to get rich off these investments. Five years ago, one share of Bitcoin could be purchased for $410. Now its value is $49,928. This egregious spurt has made many wealthier than they ever could’ve imagined, while leaving many others regretful, as they sold a stock for other assets that didn’t have the long term value Bitcoin has proven to have.

One question now remains: how is Bitcoin created and how is there a finite limit to the amount of bitcoin in the world? In short, there is a cap to how many Bitcoins can be created (21 million) and it’s made through a process known as mining. In order for new bitcoin to be circulated, new blocks have to be added to the blockchain. Miners compete with each other to add the next block to the chain by bundling up transactions. Essentially, they’re competing with each other for a specific code. They solve a computational problem (known as the “proof of work”) that allocates the block to an underlying code. The block that’s chosen (aka the “winner” of the miners, or the first person to get the right code) is distributed to all the other miners in the network and is added to the blockchain. However, being first doesn’t necessarily mean you can cash in immediately, as other miners have to verify that the proof of work is legitimate. Mining is a tricky and controversial process, as it consumes around 121.36 tera-watt hours a year. In fact, according to the University of Cambridge Bitcoin Electricity Consumption Index, Bitcoin consumes more electricity than all of Argentina. That’s because at its core, Bitcoin mining is guessing, with the total number of possible guesses for each problem being in the trillions. This requires an incredible amount of computing power.

In sum, there’s no doubt that Bitcoin, and all of cryptocurrency, could transform the world we live in today. More and more businesses are now accepting cryptocurrencies as a type of payment (Tesla and the Dallas Mavericks being two examples) and other companies have begun investing millions of dollars worth of capital. As a forewarning, the concept is still relatively new and people shouldn’t be surprised if the government starts getting involved soon. As more and more people start to learn what cryptocurrency really is, changes will most likely be made in order to protect the way the financial system runs today.

Andrew Leuciuc

Writer - Mezo Inc.