Talking About Bitcoin in a Way People Can Actually Understand
Recently, Bitcoin has entered the topics of everyday conversations. Whereas other cryptocurrencies are still less talked about in the mainstream, Bitcoin joined the playing field of real world economics and currency. Of course, none of this matters if you (understandably) don’t get how Bitcoin works — it’s time to decipher this complex system in a simpler way.
I heard about Bitcoin long before most people I know. Back around 2011, my extremely nerdy and technologically savvy brother attempted to tell me about the cryptocurrency that he had recently invested in. I tried to follow along with what he was so excitedly saying, but my 13 year old brain didn’t understand the full magnitude of the technology. As I listened to my brother exclaim about the future of secure transactions and some man named Satoshi, all I managed to do was wonder why in the world anyone would spend so much time and money on something that didn’t seem to have value.
Fast forward to present day: while there are still many aspects of Bitcoin that perplex me, it’s impossible for me to question its significance anymore. I may have brushed off what I heard back in 2011, but the now ubiquitous Bitcoin refused to stay behind.
So, Bitcoin clearly matters for some reason, but we’ll get into why that is later. The first step is to understand what exactly this thing is. Invented by the pseudonymous Satoshi Nakamoto in 2009, Bitcoin is the world’s first decentralized cryptocurrency. Cryptocurrency refers to a digital token that is secured with encryption; building on that, encryption is when data is converted into code in order to prevent unauthorized access. The specific kind of encryption used in Bitcoin is called asymmetric or public-key cryptography, which is explained in-depth in the video below. In short, this asymmetric encryption assures that those involved in the exchanging of bitcoins are virtually untraceable and completely anonymous.
As previously mentioned, Bitcoin is decentralized, meaning that it’s unregulated by banks, governments, or any single individual. This aspect of the currency is what made it a game changer back in 2009, and what remains appealing about it today. But, if this monetary system isn’t regulated by any sort of institution, then how is it regulated?
“Bitcoin is designed to bring us back to a decentralized currency of the people.”
In a system also developed by Satoshi Nakamoto, Bitcoin is regulated in its own P2P network. P2P, or peer-to-peer, is defined directly on the Bitcoin website as, “systems that work like an organized collective by allowing each individual to interact directly with the others.” While this sounds like it can easily be manipulated for personal gain, the true brilliance of Bitcoin’s security is in the blockchain that is maintained on the network. Blockchain is the virtual public ledger that records every transaction made on the Bitcoin network in chronological order. Every user that is a part of the Bitcoin network shares an identical copy of the blockchain stored in their Bitcoin software — any time a bitcoin transaction is made, it has to be confirmed across all of these individual copies. As software developer Gavin Andersen describes it, “Bitcoin is designed to bring us back to a decentralized currency of the people.”
All of the computers running Bitcoin software to process the blockchain, otherwise called “nodes,” follow the original protocol that Satoshi Nakamoto implemented in order to prevent misuse of the blockchain. While a physical ledger could be used to manipulate financial records, the blockchain functions according to the Bitcoin protocol which prevents such changes from being made. This means that the very first transaction of bitcoins made all the way back in 2009 can never be altered — the same goes for each transaction after that one. The Bitcoin software protects this with the protocol, ensuring that the blockchain is consistent across every node on the network.
True to its name, a blockchain is made up of individual blocks, which are the confirmed and pending transaction records. Since each transaction is contained in a block, which is in turn part of the blockchain, which is in turn contained on every computer in the Bitcoin network… bitcoin transactions can take a bit of time to confirm. While the average time it takes to confirm a transaction and create a new block is 10 minutes, periods of high traffic involving bitcoins can raise this time.
Now that we know how Bitcoin works, we can talk about the actual bitcoins themselves. Bitcoins are obtained in a process called mining, which happens when a computer running Bitcoin software solves mathematical calculations to produce a new block (confirm a bitcoin transaction). When a miner has their block confirmed by all other parts of the Bitcoin network, it is added to the blockchain, and a number of bitcoins are rewarded to the miner as a result.
Bitcoin mining sounds easy when it’s broken down to its basics like that, but the truth is it’s a very difficult process. Miners have to use special computer hardware in order to run such complex mathematical calculations, and they don’t receive any bitcoins unless their block is approved before any of the other thousands of blocks that are also being shared. While Bitcoin mining is very competitive due to these factors, it’s that competition that gives the Bitcoin network such security. For every miner that exists and runs the Bitcoin software, that means another copy of the blockchain to confirm transactions. In my mind, it’s like a virtual gold rush.
While miners are rewarded in bitcoins for their work, they cannot create bitcoins. The Bitcoin protocol defines a finite number of bitcoins that can be produced through adding blocks, and that number is 21 million (predicted to be reached in 2140). This scarcity of the currency provides additional incentive for miners, since Bitcoin can’t be mined forever. Satoshi’s brilliant protocol also adds even more security to Bitcoin — since there is a set number of bitcoins that can exist, and every new bitcoin is recorded through the blockchain, it’s nearly impossible for someone to claim to have bitcoins that they don’t actually possess.
Another point to mention is that Bitcoin’s value is entirely speculative. Much like the U.S. dollar after the end of the gold standard, bitcoins have no intrinsic value since they’re just digital tokens given to those who solve mathematical calculations. The more companies willing to accept Bitcoin as tender, and the more financial institutions that give legitimacy to Bitcoin as currency, the higher an individual bitcoin’s value will rise.
Towards the end of 2017, one single bitcoin was worth nearly $20,000. While its value has fallen since then, there’s no telling when it will spike again. Bitcoin is being accepted in more and more situations, ranging from Microsoft to OkCupid to Subway, and this increasing use only serves to cement Bitcoin’s value. Even if you’re not rushing to buy mining software and join in on the craze yourself, it’s undeniable that Bitcoin is sneaking into our lives more and more each day. From economists discussing the viability of bitcoins to pop culture referencing its complexity, this cryptocurrency will continue to make history.