What Is Bitcoin And How Does It Work?
Bitcoin remains a hot topic.

One of the most intriguing things about Bitcoin is that even if you've been hearing about it constantly for the past few years, you still may not be sure entirely what it is. Googling Bitcoin gives you less of a concrete definition and more of a shouting match. "Bitcoin is thriving!" "Bitcoin is dead in the water!" "It's going to overtake the dollar!" "It's a Ponzi scheme!" But what is it that they're even arguing about?

Cryptocurrency, aka digital assets that can function as a form of currency, is still very much in its infancy, which is why Bitcoin's value is notoriously volatile. But Bitcoin's astonishing success has made it something people want to know about. Bitcoin's success isn't just surprising in how much it's worth (though it has had a rough 2018 to say the least) but also in how it has survived. There are thousands of articles written every month that say Bitcoin is dead. Many of them have had good reason to think it. Yet it's still here after all this time.

This makes Bitcoin a fascinating entity for people. What is this mysterious online currency that will not die? It has paved the way for other notable cryptocurrencies like Ethereum and Bitcoin Cash, but is still far and away the most valuable digital currency. It has gone from an online punchline to a possible investment, from being fundamentally worthless to Bitcoin's price being nearly $20,000 at its peak in Dec. 2017. That's why people want Bitcoin explained: once you've learned the financial potential of the digital currency, you may as well learn what it is, too.

So... what's Bitcoin, exactly?

What Is Bitcoin?

Is Bitcoin a currency? An investment? An asset? A stock? Well, yeah. It can be all of them. One individual Bitcoin is a piece of digital currency, otherwise known as BTC. As a general concept, Bitcoin is a system for securely buying, storing, and using money digitally. Bitcoins are found by Bitcoin miners and added onto the public blockchain network - but we'll get to that later.

Thanks to rapid advances in public interest in the cryptocurrency, you can buy Bitcoins online or on your phone with popular apps like Coinbase - though many still choose to mine Bitcoins. Once you have Bitcoins, stored in a Bitcoin wallet, you're welcome to use them as currency or you can hold onto them as an asset to invest in (much like gold). Bitcoin, which is mined with expensive hardware designed to solve intricate mathematical problems, is that there is a finite amount of it - 21 million Bitcoins, to be exact.

The idea behind Bitcoin is for there to not only be a digital currency, but a decentralized network behind it in contrast to the highly centralized system banks use for fiat currency. Bitcoin transactions are irreversible, and the pseudonymous public ledger the transactions are made on give it a level of transparency other financial systems don't offer.

What is Bitcoin Mining?

The process of Bitcoin mining is an elaborate one, and a deeply controversial one as well. This is the process wherein solving the aforementioned mathematical problems comes into play. In Bitcoin mining, the computer solving this problem is part of what's known as the "proof-of-work system." In this system, the computer attempts to determine a number. The computer that successfully finds the number uses it to hash a block to the previous block in the blockchain network, announces it to the network which validates it, and is then rewarded with BTC.

This process has become controversial because the amount of energy it takes to mine a single block is astonishing; computers make billions of guesses per block, and system is designed to keep the pace of a block getting mined every 10 minutes. That's billions upon billions of guesses a day for just a single computer, and the constantly-growing group of miners means a lot of people using this method that is not at all energy-efficient.

It also has made it far less likely of a single person mining a Bitcoin. Bitcoin miners are a dime a dozen today, and an individual will need to spend a lot of money on their computer and an expensive ASIC miner that gives them the best chance of mining BTC. As a result, mining pools, where Bitcoin miners pool their resources together and split the BTC reward among the entire pool, have become more common.

What is Blockchain Technology?

The blockchain network is essentially a transparent ledger, and is sometimes referred to as distributed ledger technology (DLT). The "block" is a collection of transactions, and the "chain" is the hash that connects the blocks, creating a network. Before it can be added to the block, the transaction must be validated by the other computers within the network, known as nodes. These are the nodes also doing the mining. They go to work trying to determine the hash for a block that will reward them, they validate the new block and continue to validate all existing blocks.

Bitcoin owners have two different keys: a public one and a private one. The public key is what everyone else in the network can see; if you make a transaction, it appears in the blockchain with your public key, and the recipient's public key is used to send Bitcoins their way. The private key helps to verify the sender; essentially, B's public key is used as an output for where to send them, and A's private key is used to sign off on the transaction.

Once this happens, the other nodes get to work validating the transaction. This is where the mining begins. Added to the other transactions set to be in the next block, miners get to work trying to validate the block with a proof-of-work. These are the mathematical calculations the computers attempt to solve. Once the proof-of-work is solved, the block is validated and confirmed.

Blocks are bound together by a hash, a unique string of characters. The information within a block generates these hashes, and they are contained not just in that block but the block after that. This way there is a running record of the information that is always making sure it's consistent. If there is an attempt to change the information in a block, it will change the hash - but not in the next block.

Blockchain technology is said to have other uses and potential in other industries, but as a concept it has become inextricably linked to Bitcoin.

The History of Bitcoin

The Bitcoin system was created and put into place by "Satoshi Nakamoto." That's in quotes because nobody knows who that is, whether it's one man or woman or a group of people. What is known is that early in 2009, Nakamoto mined the first 50 Bitcoins, and an industry was created.

The next enormous step in Bitcoin's progression came nearly a year and a half later, when a man named Laszlo Hanyecz paid 10,000 Bitcoins for two pizzas, the first confirmed purchase in the cryptocurrency's history. At the time, the Bitcoin rate was mere fractions of a penny for 1 BTC. Today, that same number of Bitcoins is worth over $70 million. Let's hope it was at least pretty good pizza.

By 2011, Bitcoin began increasing rapidly in value, from penny fractions to being worth over one dollar. Over the next couple of years, controversies drive the price up (via seemingly random periods of investors getting involved) and down (after a security breach of Mt. Gox, then the top Bitcoin exchange), an absurd level of volatility that has become the norm for cryptocurrencies. After 2013, though, it stagnated for several years. It's rise goes from speedy to slow and steady.

But 2017 brought back the crazy up and down Bitcoin we know and love, as Wall Street began to see Bitcoin as more viable than ever. The end of the year sees a massive BTC price peak, coming close to $20,000 in Bitcoin value. A more detailed timeline can be found at New York Magazine.

The idea Nakamoto had for Bitcoin was outlined in a 2008 white paper. Nakamoto believed that the use of third parties (like banks) in financial transactions made them too susceptible to fraud, saying that people needed "an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party." Nakamoto was able to attain this decentralized network with blockchain technology.

Buying and Selling Bitcoin

You've likely heard of Bitcoin mostly in terms of people holding onto it and seeing how it changes in value. And that's often how people use BTC. But it is a currency, and for those wondering, it is entirely possible to both buy Bitcoin and sell Bitcoin.

Buying Bitcoin is quite a bit easier than mining for it. Most major Bitcoin exchanges allow you to purchase BTC using your credit/debit card or bank account. This includes some of the most notable and largest exchanges out there for crypto, like Coinbase or Coinmama. There will be some added security measures, like proof of identification and two-factor authentication, to make it a safe transaction. Take advantage of any security measures you can get to try and avoid hackers.

These exchanges usually also allow you to sell your Bitcoins as well. This is where you'd want to have your bank account information ready in the exchange and your security measures in place so that you can more safely sell your BTC back to the exchange and get the fiat currency value back into your bank account.

If you'd rather use cold hard cash, check and see if there is a Bitcoin ATM at a location near you. Some places, especially major cities, have Bitcoin ATMs scattered about where you simply need to prove your identification and present your Bitcoin wallet QR code to get your desired amount of BTC transferred into it.

Bitcoin exchanges can be convenient, but they're also a third party in a system that was built to not deal with third parties. So when buying or selling, some try to bypass exchanges entirely and use trading websites that instead partner you with another individual whom you can exchange BTC with. This is, of course, an extremely risky thing to do. It can be hard to trust a random person to do a fair trade with you if you don't know them.

Bitcoin Wallets

Whether buying or selling, trading or holding, if you want Bitcoin you need a wallet to hold them in. They public and private keys that make the blockchain network work are essentially what a Bitcoin wallet is. They verify the buyer and seller of a transaction to the network.

Bitcoin wallets have developed significantly in the past decade. There are hardware wallets available, devices that allow for cold storage of your cryptocurrency offline. There are also software and mobile wallets that are online, and often are attached to an exchange where you can buy and sell Bitcoin. Make sure you have security measures on your computer, as cryptocurrency exchanges are no strangers to hacking scandals.

Because wallets are just these keys, another option is paper wallets. These are wallets that just have a QR code of your public key on a piece of paper. It keeps everything offline. Just don't lose it!

Investing in Bitcoin

When people hold onto their Bitcoin instead of spending it, content to see what happens to the price of it, they are essentially treating Bitcoin as an investment.

There are other ways you can invest in Bitcoin on the stock market. There are Bitcoin futures and Bitcoin ETFs. There are also Bitcoin-adjacent companies, like those that make graphics processing units (GPUs) that are commonly used to mine Bitcoins. But if you're looking into a simple way to invest in Bitcoin, the easiest way is to buy some BTC, hold onto it in your wallet, and monitor the changes in price. You'd be treating your Bitcoins the same way you'd be treating any other shares, and it would be a way to diversify your portfolio.

Can You Buy Things With Bitcoin?

Still, if you're looking to spend Bitcoins it's possible. Most Bitcoin purchases are done online thanks to online retailers like Overstock.com, which has become more invested in blockchain technology than nearly any other company.

Some stores accept Bitcoin if you go too; one notable pizza place in Jersey City, NJ, Helen's Pizza, accepts Bitcoin (fitting considering the first ever purchase of Bitcoin was pizza). The idea of paying for goods and services with Bitcoin, especially outside of the internet, is still very much in its infancy. And considering the volatility and unpredictability cryptocurrency has always shown, if Bitcoin payments become widespread we're still not close yet. But more and more places have begun testing it out as a possibility.

What Is the Bitcoin Exchange Rate?

It's a common question among people interested in investing or trading in Bitcoin: what's the exchange rate, Bitcoin to dollar in particular? It's simple division. As of this writing, Bitcoin price in USD is $6,403.73 for 1 BTC. So if you wanted to buy $50.00 worth, how much Bitcoin is that? Just divide the amount you're looking to purchase with the exchange rate, in this case 50/6928.3. At that rate, you'd be buying 0.0078 BTC.

Who has time to do that math, though? Well, maybe you do. But who wants to do math? Many prominent cryptocurrency websites offer easy-to-use calculators that figure out the exchange rate for you, like Coindesk and Bitcoin.com. Googling "Bitcoin exchange rate" gives you a handy calculator too. You can keep track of the exchange rate and the current BTC price at all times, and use it as a judgment call to determine if the cryptocurrency is the right investment for you and its current value.

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