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 as of this writing it's in a bit of a downturn) 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 so far, each time they've been proven wrong.

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 and How Does It Work?

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. 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.

Mining is a way to get bitcoins, but thanks to rapid advances in public interest in the cryptocurrency, you can buy bitcoins online or on your phone with popular apps like Coinbase. 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 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.

What Is Blockchain Technology?

If you've heard of bitcoin, you've likely heard about blockchain too. Though blockchain technology has other uses, the two have become inextricably linked. The blockchain is the biggest selling point of bitcoin, what keeps it safe and what allows it to stand out so immediately from other currencies. Thus, having the blockchain explained goes a long way toward understanding how bitcoin works.

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.

Let's say you, A, are trying to send your friend, B, .25 BTC. The actual request to make this transaction has become easier than it used to be with the emergence of major bitcoin wallets. Request your transaction to B and off the request goes!

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 networks allow for total transparency. People in the network can see the transaction, it isn't completed until everything is validated and confirmed, and it is essentially irreversible. In addition, each node in the network is constantly validating these transactions, making the network decentralized. The goal of blockchain networks is to be a much more secure option for processing these transactions since there is no one central area to target.

Potential Uses for Blockchain Technology

Because blockchain is designed to be so much more secure than other digital networks, the consensus is that it's only a matter of time before it becomes a far more common presence in people's lives.

One of the most intriguing and potentially game-changing ways it can be applied is with cloud networks. Generally in cloud networks, your data and information is stored centrally. Could a decentralized cloud prevent future hacks? Huge companies seem to think so - Bloomberg recently reported that Google was moving forward with its plan for a blockchain-based cloud service, among other applications.

Blockchain could also be helpful in the realm of digital identity. Data breaches have plagued massive companies for years now, seemingly unable to adapt to technological advances. Storing your identity and the personal information that comes with it in a more secure, less centralized network could be massive for these companies, keeping your information safer and saving them legal troubles and PR disasters.

Considering blockchain is used for digital currencies, it makes sense that one of its most important future uses could be in finance and banking. This doesn't just include transaction processing and identity; the Australian Securities Exchange has been working using blockchain technology for clearing and settlement.

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 $6,928.30 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 0.0072 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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