Bitcoin details can get complex, but the basics are pretty much easy. Here is what you need to know about Bitcoin:
Bitcoin is the most famous cryptocurrency. It is certainly not the only one, but it was the first true peer to peer cryptocurrency and is the most widely used today.
So what is a cryptocurrency? Crypto is about encryption. In this case it is about digital encryption. Currency is about a system of money. So a cryptocurrency is a secure digital system of money based on encryption.
There were many experiments and proof of concepts with cryptocurrencies before bitcoin. But none had bitcoin’s methods and features so none of them were going to be widely adopted because of their approaches. New, better methods were needed, and that is the breakthrough of Bitcoin and the Bitcoin blockchain.
The lead developer of bitcoin is a reclusive developer who uses a pen name: Satoshi Nakamoto. Satoshi was active in communications with a small cadre of other smart developers working on digital encryption and privacy, including Hal Finney, Nick Szabo, Phil Zimmermann, David Chaum, Tim May and Adam Back. Many believe Satoshi might be one of those developers, but there is no real proof (some circumstantial evidence pointed to Hal Finney, but he denied it before his death. Others point to Nick Szabo, but really no one knows). But it is important to recognize that Statoshi was part of an ecosystem that included many thought leaders and pioneers, and he recruited several of them to help him implement the bitcoin solution known as blockchain. It is even more important to say that Bitcoin is more important than its lead developer, it is a system that works and that is its proof.
Satoshi’s stated goal was to create a new electronic cash system that was completed decentralized with no server or central authority. Coding and development and nurturing of the project was completed by 2011, after which time Satoshi turned over the source code and domains to others in the cryptocurrency community. Right now, all Bitcoin leadership is done in the open via forums like the BitcoinFoundation.org where anyone can dive deep into the technical details of how this works.
But the beauty of bitcoin and other similar crypto currencies is that you don’t need to be a developer to use them. It would be helpful if you have more of an understanding of what is goin on here. So here is more:
Bitcoin is 100% digital, so there is no need for paper money to use it. Since it is designed to be decentralized, no single bank or country can control it. Owners can have lots of anonymity (we chose these words carefully, the blockchain was designed to give anonymity, but in reality things are so traceable and there are so many other factors in play that no one should ever think they are totally anonymous in using this.
But, instead of using names, tax ID’s or social security numbers, the bitcoin method connects buyers and sellers through their encryption keys and records transfers on a ledger that is designed to be impossible to fraudulently manipulate. This gives it an ability to operate in a way that is secure, and at the same time is not controlled.
The methods for generating these benefits takes computing power. But since the goal was not to have a single computer or even single datacenter to document all this, the design for generating these benefits is based on distributed computing. To reward those that use their computer resources for this distributed computing, bitcoins are provided to those that do this via an method that rewards those that help by giving them some bitcoin. This process is known as bitcoin mining.
What bitcoin miners are doing is running software that manages the bitcoin distributed ledger (the blockchain) and verifies the data in the blockchain. It does this by using cryptographic functions (called hashes).
These days, bitcoin mining has evolved to the point where only very powerful computers can economically “mine” bitcoin. The only reason to try this yourself today is if you want to really learn the nuts and bolts, but odds are that you will never make back the money you would invest in bitcoin mining. The same may or may not be true for other new cryptocurrencies. Consider mining if you want to learn and do it for the education, otherwise understand that there are powerful and well funded consortia set up in this space who are doing this to win.
The value of a Bitcoin is what has surprised many. Like many other things, the value is what people are willing to pay for it. If everyone wants some, including the rich guys an institutional investors, the price will go way up. If people don’t want it anymore, the price can go way down. Should you buy now? Or, if you own it, should you sell now? This is a question that even experts are going to get wrong. Our advice on buying is only buy what you can speculate with. Our advice on selling and when to sell is to sell to keep a balanced portfolio, and when selling, instead of selling for cash, consider switching to another coin type (like LIitecoin or Ethereum).
If you want to buy bitcoin the way to do that is through a digital currency exchange. They include Coinbase (has become the obvious first choice for most, allows trading in Bitcoin, Ethereum, Litecoin), Coinmama (supports Bitcoin and Ethereum), CEX (very simple to use, supports Bitcoin, Ethereum, Dash)), and Kraken (supports Bitcoin, Ethereum, Bitcoin Cash, Monero, Dash, Litecoin, Ripple, Stellar and several other coins). These all help you buy, sell and store your bitcoin. These exchanges make money through transaction fees.
There are risks in using Bitcoin and related cryptocurrencies. One risk is the risk that your currency exchange might get hacked or might be mismanaged and result in your Bitcoin being stolen. This has happened before. Ways to mitigate this risk is to pick a good exchange and consider diversifying to spread risk around. Another risk is that governments will regulate this in ways that make it less attractive. And another is that governments will find new ways to tax this system. It is important to keep track of these developments.
Ready to dive a bit deeper? See: The Clearest Explanation of Cryptocurrencies You Will Ever See