In this article, we explore the popular cryptocurrency Bitcoin: what it is, how it works, and what you need to know from the mindset of an investor.

 

It’s the mid-2000s.

Some friends and I are gearing up for a trip to Las Vegas.  Mike, the organizer, is doing most of the buying since he has the Costco card.  The rest of us will pay him back later.

Mike doesn’t want cash, so I send him my share through PayPal on a Friday. But, unfortunately, Sunday rolls around, and the funds still haven’t been delivered to his account.  

I make the joke that I could have personally walked the money over to Mike in less time, which is totally true since he doesn’t live too far away from me. So why did this have to take so long?  Why couldn’t I send money from here to there without taking the better part of a week?

The problem with using services like PayPal is that for me to send money to Mike, it has to go through both of our banks before it ends up in his PayPal account.  Not only does it take a long time (since banks usually aren’t open on weekends), but they could choose not to process our transaction if they wanted to. 

Our simple exchange of money is totally in the hands of the banks, and I see that as a problem in need of solving.

Mike eventually gets his money, but man, did that take forever.

And this is where bitcoin comes in.

 

What the Heck is Bitcoin?

Bitcoin is a kind of digital cash that users can send directly to one another.  No banks.  No one to tell you, “nope, you can’t do that.”  Just two people, freely exchanging.  What a concept!

Now, when I say “Bitcoin,” I’m really talking about two things.  The first thing is the currency that you’re sending, the digital money. So I’ll use lower case “bitcoin” for this.

The second thing is the Bitcoin network, the computer program that runs the whole show.  This will be “Bitcoin” written in upper-case.

I kind of like to think of Bitcoin, the currency, like the train that moves from one station to the next.  I think of the Bitcoin network, the program, as the rails that the Bitcoin you send moves on.  Both need each other to do the job, which is moving value from one place to another.  Choo-choo, baby.

 

How Does Bitcoin Work?

So if Mike and I had used Bitcoin for our transaction instead of PayPal, he could have had his money much sooner.  We’re talking a few minutes, maybe less.  Instead, it took literal days before he got it.  Ain’t nobody got time for that!

Yeah, but what makes this revolutionary?  Isn’t this a basic concept that should have been around for a lot longer than just the last ten years?  Exactly what took so long to make this happen?

The problem with digital money, for the longest time, has been the “digital” part.  That is, digital things can be easily copied over and over and over again. 

Sort of like that picture of you in college that you want to forget ever happened that now exists on the internet forever.  You know the one.

 

The Double-Spending Problem

The issue with money is that it can’t be copied for it to be legit, and the same money can’t be spent more than once. So while it sounds awesome to be able to press “copy” on your digital dollar and go nuts on an endless online spending spree… that wouldn’t exactly work if literally everyone could do the same thing. 

Well, this is what’s known as the “double-spending problem,” and it’s the age-old issue that Bitcoin finally solved.

What’s that?  How did it solve this, you say?  I thought you’d never ask!  

See, Bitcoin uses thousands of computers worldwide to agree on whether the transaction between Mike and me is valid, and they’re rewarded for keeping it honest and playing by the rules. 

 

Let’s use a basketball game as an example.  

In a basketball game, the official scorekeeper records the score. However, that scorekeeper is usually just one single person… a person who can make mistakes or even manipulate the game’s score.  That’s “centralization,” where one person is responsible for keeping things fair, honest, and accurate. 

One single person, one single point of failure. 

Now, let’s imagine that instead of one person keeping score, any person in the stands who wants to keep score gets to do so, and they’ll even get paid for it if they do it accurately.  Cha-ching!  

So let’s say you volunteer to help keep the score, recording all the shots.  At the end of the game, you get together with the other volunteers and compare your scores.  They all match!  And you all get paid for your efforts.  The game’s final score is now official, and it goes into the record books.

That, my friends, is how Bitcoin works.  The final score in this example is the settled bitcoin transaction between me and Mike, which has been checked and approved by the participants in the Bitcoin network.  It all adds up, and now it’s official!  Vegas baby, Vegas!

Now that we have an idea of how Bitcoin works, it might help if we take a look at where it comes from in the first place.  We need to cover a few topics to understand this thang better:

• Blockchain
• Bitcoin Network
• Miners

Still with me?  Let’s keep this party rollin’, y’all.

 

The Bitcoin Network: A Chip off the Ol’ Blockchain

Thousands of computers around the world are running the Bitcoin program, like, right this minute.  Let’s call this network of connected computers the “Bitcoin network.”  This network runs on something called the blockchain.

Wait… the what?

Sound fancy and confusing?  It’s not.  It’s literally a chain… of blocks.  Seriously.

 

Let’s use an example.

Imagine that this box belonging to my toddler is a block in the blockchain.  It’s a brand new block, so it’s empty.

Now back to the bitcoin transaction between Mike and me.  When Mike gets the bitcoin, the transaction is recorded on the blockchain. So in terms of my kids’ boxes, that transaction between Mike and me is represented by Princess Tiana, who’s been added to this box.

Every approved bitcoin transaction is added to the block in order until the block is full. So these Disney princesses are all transactions, each added to the blockchain.

Once that block reaches its capacity, another block is created…

and the process repeats itself and forms a chain.  Of blocks.

 

Ok, but what’s so great about this blockchain stuff?

• For starters, every transaction on the blockchain is preserved forever and can’t be changed or manipulated by bad actors.
• The records are all shared and maintained by every computer running the Bitcoin program, so it’s decentralized… no single point of failure.
• For every new block that’s created, new bitcoin is also created as well.

And on that note, let’s look at how new baby bitcoins are born: mining.

 

Mommy, Where Do Bitcoins Come From?

Why, from mining, my dear.

What’s mining, you ask?  Well, kinda like how gold miners use their energy to mine the earth for new gold, bitcoin miners use their computer power to “mine” for new bitcoin.

Like I mentioned earlier, thousands of computers worldwide are running the Bitcoin program and approving transactions like the one between Mike and me.  These computers (called “nodes”) are using a lot of electrical power to do this.

 

So… what’s in it for the miners?

I mean, isn’t this expensive work?  Electricity ain’t free, man.

Well, to be rewarded for their work, these nodes are given a chance to be gifted some sweet, sweet bitcoin if they are chosen to create a new block.

These nodes are all competing with each other to solve a really, really hard math problem.  These math problems take about ten minutes to solve, and at the end of that ten minutes, new bitcoin is created, and a new block is added to the blockchain.

If your node is one of the lucky ones that solve the math problem… BOOM!  You get some bitcoin.  Pretty awesome incentive, right?

 

 

How often does this happen, and what’s the payout?

Every ten minutes, a new block is created at the time of this writing, and 6.25 new bitcoin are “born.”  This number gets cut in half every four years, which means bitcoin is getting more and more scarce as time goes on.

This might be a good time for some bitcoin factoids, so check it out:

• In January 2009, the first-ever Bitcoin block (called the “Genesis Block”) gave birth to 50 bitcoins.
• 50 more bitcoin were created every ten minutes for about four years.  Then that 50 was cut in half to 25 in 2012, then to 12.5 in 2016.
• Currently, 6.25 bitcoin are created every ten minutes.
• When the bitcoin production is cut in half every four years, the event is called a “Halving.”
• The very last bitcoin ever is expected to be mined in roughly 2140, over a hundred years from now.
• There will only ever be 21 million total bitcoin, and as of right now, about 18.5 million of them have been mined.
• Bitcoin can be broken down into tiny increments, all the way out to eight decimal places.
• Bitcoin’s smallest unit is called a “satoshi,” a hundred millionth of a bitcoin (0.00000001).

But wait… why’s it called a “satoshi?”

Well, this leads us to our next topic…

 

Who created Bitcoin?

Ah, the age-old question.  And the truth is… no one really knows.

The Bitcoin whitepaper was published in 2008 under the pseudonym “Satoshi Nakamoto,” and to this day, the debate rages on the true identity of the mysterious Satoshi.

And really… this may be one of Bitcoin’s greatest attributes.  The fact that the world’s first truly decentralized cryptocurrency has no one person to point to is so in line with the goals Bitcoin set out to achieve.

 

Bitcoin is here, and it’s here to stay.

The genie is out of the bottle. The toothpaste is out of the tube.

A peer-to-peer, decentralized digital currency.  One that can’t be taken away or censored by a third party.  This is the first step toward financial liberation.

And in today’s world where government money-printers are working on overdrive, the future of Bitcoin looks more and more promising each day.

This is crypto, my friends. The future is now.

 

Stay golden.

 

Done your research and you’re ready to make your first purchase, but not sure where to go? Check out my introductory article on crypto exchanges.

Are you a bitcoin holder?  What first got you into bitcoin?  Leave a comment below.