Do you really know what bitcoin is? Maybe it was those stories you heard — Lamborghinis and second mortgages, fortunes made and lost off of something you didn’t even really know existed until six months ago. Maybe it’s those eye-popping charts you keep seeing, the ones that go $5,800 per unit to $19,000 per unit in just one month … and the other ones that go in the opposite direction in just one week. Maybe all of your friends are constantly watching their phones, tracking their own investments, celebrating their newfound riches, freaking out about their sudden, sharp losses, and you just hate feeling left out. However you heard about it, it is now clear that this is at least something you should know about — whether to invest, or just to inform your Schadenfreude. The problem is, well, what … is a bitcoin, exactly? Secretly, you know you don’t understand the thing, even though you may pretend to. Isn’t it mostly for buying drugs? Where would I even buy one? Why would I want to? And isn’t it already too late to be asking these questions, let alone actually investing in it?
Seriously. Remind me what a bitcoin is?
A bitcoin is one unit of an anonymous digital currency called, yes, bitcoin.
Hang on: “anonymous … digital … currency”?
That’s what it was built to be, at least — a theoretically untraceable and unhackable version of PayPal, more or less. But so many people got so excited about buying into the system that a market developed around buying and selling it — with bitcoin becoming less important as a currency than as a commodity, like gold.
You can still buy things in bitcoin (like you can with gold, sort of), but many more people are now using it as an investment vehicle.
So bitcoin is a currency and a commodity?
Something like that. Fundamentally, bitcoin is a secure system for storing and exchanging money anonymously on the internet. In some contexts, it works like untraceable money (for, say, buying drugs on the dark net); in others, it works like a safety-deposit box without a bank (like when it’s used to store money away from the prying eyes of governments); in still others, it’s a tradable financial asset like a stock or bond (you could use bitcoin to become a millionaire). But each of these metaphors has limitations, too.
Unlike most currencies, bitcoin is not supervised or endorsed by any government; it has incredible price volatility, which makes transactions complicated and undermines the safety-deposit-box approach; and, unlike the stock market, where valuations are based at least theoretically on expectations of future company value, there is no “fundamental” basis of speculative value for bitcoin.
Wait: Is bitcoin … real?
No, but then again, neither is the dollar.
But the dollar is backed by the U.
Who needs a central government when you’ve got an unhackable, unfoolable currency?
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Why would anyone buy a bitcoin?
For the same reason you’d buy anything: Because you think a bitcoin is worth something. And there are a few different reasons to think it is. Maybe what’s valuable to you is bitcoin’s anonymity: A lot of people really like operating anonymously on the internet. Plus, if you want to move your money out of an economically or politically unstable country without being hit with taxes or currency controls, converting your fortune to bitcoin might help. Or maybe what’s valuable to you is bitcoin’s whole philosophy — you believe it will someday be widely adopted as a day-to-day currency, and you want to buy in early. But those are the reasons people originally got into bitcoin — the true-believer stage. Now people are getting in because they think they can make money — the investment stage.
In that case, what’s valuable is, well, the fact that everyone else is buying bitcoin and you think its price will keep rising.
I mean, will its price keep rising?
That depends. Unlike most regular currencies, whose purchasing power declines over time, bitcoin was designed to be deflationary: There are a limited number of total bitcoins, and new ones are added to the market slowly. What drives the price up is if more and more people show up hoping to buy the existing coins, thereby bidding up their value. But that’s a big if — if bitcoins never reach widespread adoption, or if they’re too difficult to convert into more usable cash, their value will go down.
This seems pretty risky.
And even setting aside the long-term case for bitcoin, in the short and medium term the currency is terrifyingly volatile. On paper, 2017 was very good to bitcoin — this time last year, one bitcoin was worth about $900; it’s now worth about 15 times that — but also very stressful to bitcoin investors. Within one week in December, Bitcoin hit a high above $19,000, dropped to as low as $10,400 , and then climbed back up above $15,000 24 hours later.
Who would create something like this? And, honestly, why?
For years, hacker-types have been trying to create a digital currency that can be used reliably without the need for a government or central bank. (Because, you know, Big Brother and all of that.
) In 2008, a pseudonymous programmer called Satoshi Nakamoto apparently solved the problem with bitcoin, a system that seemed to secure financial transactions outside the authority of a central bank. It distributed the task of verifying transactions across a whole network of computers.
That was Satoshi’s big innovation?
Yes: to secure transactions without the oversight of the government. If you send bitcoin to someone, your transaction is added to a record of every transaction across the entire network, from the very first bitcoin onward — essentially, a long bank ledger that everyone in the bitcoin network has a copy of. This record is called the “blockchain,” and, thanks to some neat cryptographic work, it is nearly impossible to forge, fool, or tamper with.
Which all makes cryptocurrency look, suddenly, like a safe way to conduct business.
Okay. So where does a bitcoin come from, if there’s no government and no mint?
At all hours of the day, all over the network, computers (called miners) race to package recent transactions on the network into an unfakeable unit (called a block) of the blockchain.
Blocks are created every ten minutes or so; this is the authenticating process, sort of like when a credit-card company verifies you have available funds. Essentially, miners are doing the work of encrypting transactions. For what reward? The first miner to create a verified block — one that follows the cryptographic rules laid out by Satoshi Nakamoto — is rewarded with a certain number of bitcoins.
Could I mine my own?
Yes, theoretically, but unless you live next to a power plant and own an airplane hangar’s worth of computers, it’s probably impossible.
Creating a block requires a lot of computing power — in part to ensure that it would be too energy-intensive and expensive to sabotage the blockchain with false transactions, and in part to keep bitcoin scarce. And while that works great for bitcoin, it’s less impressive for the rest of the world: One hotly disputed estimate holds that bitcoin mining currently uses as much energy as all of Denmark. You’re probably better off just buying from someone who already owns some, on one of many exchanges.
Before, you said “crypto-currency” — d.