As the resident techie for my friends and family, I’ve gotten a lot of questions over the years about Bitcoin. It’s been on the news, it’s made people rich, it’s a means of buying drugs, and hackers are out to steal it. But what is it? Do I need some? How do I get it? Who made it? To get started answering those questions, let’s lay some groundwork.
Bitcoin is a digital asset. And like any other asset, whether it be a dollar bill, a house, a rare trading card, or a family heirloom, it has value.
There are only 21 million Bitcoin that will ever exist. In fact, there are more millionaires in the world than there are Bitcoins, which means that even if you have more than a million dollars, you may never get to own a whole Bitcoin. And it’s because of its scarcity – and because of the features that make it useful, which we’ll get to in a bit – that people have invested in it. You can think of Bitcoin similar to how you think of gold. There’s only so much of it in the world, which makes it rare. And because the supply is limited, as demand goes up – more people wanting to own it – the value goes up.
But can’t we just make more Bitcoin? The US treasury just minted two trillion dollars for COVID relief! The answer is no. The limit on how many Bitcoin can ever exist is written right into the code itself. It’s like the first commandment of Bitcoin: There shall never be more than 21 million Bitcoin.
So if there are 21 million out there, how do you get some? How did anyone get any? We’ll get there, but some backstory first.
When Bitcoin was created, there was a concern: If one person or group controls how Bitcoin is transacted, or holds the passwords to everyone’s accounts, then it would never be an autonomous system. It may seem crazy, but if your bank one day decided to close its doors, you might be entitled to FDIC insurance, but that’s about it. You have no recourse. Your funds are constantly at risk because they are being held and managed by someone else. That is the risk of a centralized system. The creators of Bitcoin wanted to avoid that.
So Bitcoin was built differently. It was decided that Bitcoin would be completely decentralized. Instead of having a single group or bank move money, the creators of Bitcoin decided that it would put that control into the hands of every user of Bitcoin. We control who owns, who sends, and who receives Bitcoin. And for 11 years since it was turned on in 2009 by an unknown software developer(s), it has never been controlled by a single person or group.
Here’s how it works:
When Bitcoin is sent from one account (often called a wallet) to another, the sender via his computer notifies as many Bitcoin users as possible that they’re trying to send money.
The other users’ computers that are notified then continue to broadcast that message out to even more computers.
Any transactions they deem to be invalid (i.e. I tried to send $10 Billion to myself or tried to send Bitcoin that I didn’t own) are thrown out and don’t continue on to other computers.
Over time, the computers using Bitcoin have accumulated a bunch of transactions and they bundle them into what’s called a Block.
A copy of the new Block containing all the latest transactions is then broadcast to all the computers using Bitcoin to add to their list of all the Blocks that came before them.
These Blocks, in order, create a chain where each one is aware of what transactions came before it. This is where the term Blockchain comes from.
This whole process happens roughly every 10 minutes around the entire world! Now I know this can feel a bit overwhelming, but I promise we can simplify this with a real world example. Let’s imagine how rumors get spread in high school…
I tell my closest friends that Jon and Jane went on a date (Bitcoin is sent and I notify some computers using Bitcoin)
My closest friends tell their friends (They notify some other computers, trying to spread it to everyone)
If anyone that heard the rumor knows it’s not true (Jane was at work), they say so and don’t continue to spread the rumor. They tell people not to share the rumor; it’s incorrect. (Invalid transactions are thrown away)
People hear a lot of stories over a couple days about other people going on dates (Multiple transactions that are heard are accumulated in a Block)
Someone writes a Facebook post about all the crazy stuff that happened that week (The finalised Block is broadcast across the Bitcoin users’ computers)
The Facebook post, and all the rumours within, are memorialised as part of our social history and become past facts while we continue to date more people and start more rumours (The Blocks are added to the Blockchain which is a history of all transactions)
This is how Bitcoin keeps the record straight without having a single institution in the middle controlling it. Instead, that responsibility falls to us, the users. Now unlike rumours in high school, which are fickle things, there are millions of computers running these checks in tandem with one another to make sure that everything happening, all the Bitcoin being sent, is valid. But there are two more important key features that make this all so powerful:
You don’t have to be a part of checking the transactions or dedicating a computer to it to own or send Bitcoin
If you do take part in validating the Bitcoin transactions being made (also called mining), you earn Bitcoin by doing it.
Which brings us back to the earlier question: How do you get some? Well, there are two ways: You buy some from someone else, or you mine it yourself! Keep in mind though, there are millions of computers mining Bitcoin out in the world. You only earn roughly the fraction of what value you provide to the network. Right now, you’re likely to spend more on the electricity running your computer than what the Bitcoin you’d earn is worth.
There are a bunch of websites where you can buy Bitcoin and they’re out of scope for this post, but you can just look up this site’s “Exchange Review” section and choose a site that’s reputable. You can buy it with a credit card or by depositing funds from a bank account, but be aware that the movement of cryptocurrency is like any other asset: You’ll need to report on any gains to the IRS if you are American, or check your local regulations with your accountant for more information.
After all that explanation we’ve answered how Bitcoin works, and how you can buy / earn some, as well as what makes it valuable. But there’s one final question: What is a Bitcoin?
Bitcoin is simply a number and an address. Address XYZ owns this much Bitcoin. And the Blockchain is the mechanism through which we host that whole list. To show you what I mean, here’s a wallet that holds almost 80,000 Bitcoin (almost $800,000,000 on the day of writing). And here’s a wallet that’s never had any money in it. Now even though we know the balances of these wallets, we don’t know who owns them, which is why Bitcoin can be used anonymously. When you own Bitcoin, all you know is the address of the funds, and the password to that wallet. I’ll dive deeper into what makes the password and address so special and secure in an upcoming article, but by having those 2 pieces of information, you can send and receive Bitcoin.
And there you have it : Bitcoin is a system for sending and receiving value that’s controlled by no one. What started as an exploration of decentralised money that was worth less than a fraction of a cent has turned into a global phenomenon. On May 22, 2010, someone paid 10,000 Bitcoin for 2 Papa Johns pizzas. That’d be almost $100 million today. Who knows what they’ll be worth in the future.
And finally, remember : if you’re interested in owning some and just want to get started, you don’t have to buy a whole Bitcoin! Bitcoins can be bought and sold as fractions. You can still buy 1 / 100,000,000th – the unit known as Satoshi – of a Bitcoin for less than a penny today.
GLOSSARY
Bitcoin – A decentralized system that facilitates sending the digital asset, Bitcoin
A Bitcoin – A single unit of the denomination used in the Bitcoin system
A Satoshi – The smallest portion of Bitcoin one can own in a wallet (1/100,000,000 of a Bitcoin)
Wallet – A password / address associated with a balance that you can send / receive Bitcoin to and from
Block – A list of transactions that have been bundled together from a 10 minute period
Blockchain – The full history of blocks that contain all Bitcoin transactions
Mining – The process of earning Bitcoin by validating transactions