Bitcoin 101: What Is Bitcoin, How Does It Work, And Why It Matters

 Bitcoin 101: What Is Bitcoin, How Does It Work, And Why It Matters

 Not only is Bitcoin the first cryptocurrency, but it's also the best known of the more than 5,000 cryptocurrencies in existence today.  Financial media eagerly covers each new dramatic high and stomach churning decline, making Bitcoin an inescapable part of the landscape.  While the wild volatility might produce great headlines, it hardly makes Bitcoin the best choice for novice investors or people looking for a stable store of value.  Understanding the ins and outs can be tricky—let's take a closer look at how Bitcoin works.

What is Bitcoin?

 Bitcoin was launched in 2009 and began as a purely experimental technology.  The idea was to create an alternative form of currency without governments or banks managing the money supply.  Satoshi Nakamoto, an unknown person or group of people operating under the alias of Satoshi Nakamoto, published a white paper outlining the concept and goals of the currency, which was called Bitcoin at the time.  As of June 2017, Bitcoin has an estimated worth of approximately $10 billion, as trading in the cryptocurrency continues to grow rapidly.  As a cryptocurrency, Bitcoin is a digital, encrypted form of currency that can be transferred peer-to-peer through a computer network using encryption methods that are nearly impossible to crack.

 How Does Bitcoin Work?

 Before getting into how Bitcoin actually works, it's helpful to understand the fundamental difference between a cryptocurrency and traditional currency.  The idea behind cryptocurrencies is simple: There is a finite amount of virtual money, called Bitcoins, in existence.  The total number of Bitcoins is fixed at 21 million.  New Bitcoins are introduced at a rate of roughly 12.5 per hour, with the first unit of the currency being released every 10 minutes.  How Is Bitcoin Like Traditional Money?  A Bitcoin is similar to a U.S.  dollar bill in that it is both a unit of account and a unit of exchange.  Bitcoins are created through a process called “mining” which involves solving complex mathematical problems which are then verified by the network.

 Who Controls The Supply of Bitcoin?

 There are now approximately 16.5 million Bitcoins in existence, and there are a total of around 100 million Bitcoins that will be generated through the process of “mining.”  A mining process involves solving a complicated mathematical problem.  This process requires a lot of processing power.  Miners often buy powerful home computers to help with the calculation process.  As Bitcoin prices increase and more people want to get in on the action, the computing power required for mining becomes greater and greater, further limiting the number of Bitcoins that can be mined at any one time.  It’s not possible for everyone to have a stake in Bitcoin, but those that do are called Bitcoin “miners” or “coin miners.

 How To Invest In Bitcoin?

 The original cryptocurrencies (Bitcoin, Ethereum, Ripple) were created to function as a kind of digital currency.  In a broader sense, Bitcoin (BTC) is merely one of these digital currencies, but it is the biggest, the most widely used and the most commonly traded.  When you spend money in dollars or pounds, you're actually purchasing some value in that currency (the dollar, for example, represents the U.S. economy and its tax obligations).  Cryptocurrencies work in a similar way.  You purchase them with Bitcoins, and they can be spent anywhere Visa or MasterCard are accepted.

 What Are The Downsides Of Bitcoin?

 Its volatile nature often makes it a dangerous investment.  The Bitcoin investment website shows a graph of daily Bitcoin fluctuations going all the way back to 2011. Most other cryptocurrencies have been around much longer and have taken a much more stable path—at least up until recently.  Here's a look at the Bitcoin exchange rate as of this writing: This long-term volatility is part of the reason why some investors have decided to abandon the Bitcoin investment.  It’s made it hard for experts and those with little knowledge of cryptocurrency to take the plunge, as can be seen below.  As I've written in the past, Bitcoin is prone to being hijacked by a bad actor, especially if it were to be mined by a hacker and then used to fund something nefarious.

 When Will Bitcoin Be Obsolete?

 Bitcoin “mining” is the process in