Ah, Bitcoin. It’s trendy and techno-chic. It’s making your 19-year old pimply-faced nephew rich. Or is it?
Should you convert all your stock assets to it tomorrow? It depends who you ask. Can you hold it in your hand? No, at least not the way you can hold a dollar in your hand. Oh, and its value changes every minute. So what the hell is Bitcoin, and how does Bitcoin work?
It’s not a currency. Bitcoin is more like a commodity — like oil, platinum, gold, or even water. It can be bought and sold, and the free market dictates its value. Only the Bitcoin market is changing the way we think about currency.
Different from a Dollar
Remember gold? Heavy, glittery and incorporated into jewelry — it’s no wonder the stuff is valuable. It made an excellent standard for our currency system, but we went off that standard about half a century ago.
Modern currency is backed by the Federal Reserve Bank, which is like an evolution of the government’s gold coffers that takes into accounts different assets owned by the U.S. Other countries do the same.
Bitcoin, however, is associated with no sovereign nation. Its creator, the anonymous Satoshi Nakamoto, appears to believe in the creation of a new ideal — currency not tied to a government. But without the backing of a Federal Reserve or something like it, what makes Bitcoin valuable?
The answer to that question is scarcity. There are a finite number of bitcoins. They don’t look like the ones you see in magazine graphics, but are digital tokens, not unlike a share of stock you would buy.
Unlike stock, however, a Bitcoin does not represent part of a company.
Its origin is what makes Bitcoin unique. You’ve probably heard that Bitcoins are “mined.” The mining process doesn’t involve any drill rigs. Instead, the “coins” are procured by solving a complicated math equation.
Solving one before the competition can solve it earns you a specific number of coins, but you’ll need a powerful supercomputer to do it. Once an equation is solved, it is written into the “blockchain” — a permanent record of all Bitcoin transactions stored on over 9500 computers. The blockchain is extremely secure and redundant across the network of machines.
The number of coins you win goes down every four years, and there will only ever be 21 million of them, according to their reclusive creator. Some rough math suggests that number will come up around 2140. Thankfully, you don’t have to mine Bitcoin to get it. You can just buy it.
A single Bitcoin is currently worth a little over $10,000, but when you read this, that number will probably be different again, because the price of Bitcoin is extremely volatile. You can purchase anything down to .00000001 Bitcoin, making the tokens more accessible to the common man.
Bitcoin exchanges sell the tokens, along with other new cryptocurrencies. However, only some will allow you to pay for them in U.S. dollars. One popular exchange called Coinbase plays by these rules.
You can start an account today and begin buying bitcoin for dollars. Your investment can be stored in cyberspace or on a physical hard drive. There are even “paper wallets” available — just don’t lose yours, or your cash is gone.
Don’t expect to buy all that much with them, however. Businesses that accept Bitcoin are becoming more common, but the number is still small. If you need to hire an assassin, though…
Bitcoin’s Shady Past
Many people know Bitcoin as the currency that fueled the notorious Silk Road, an internet grey market of sorts, where you could buy anything from drugs to assassins, if you believe the hype.
While there is nothing illegal about trading in Bitcoin, it is popular with criminals because it offers account holders complete anonymity. Without a local account to trace transactions back to, criminals can spend as they please without the threat of government agencies tracking them down.
Will it Make a Difference?
But that doesn’t mean that Bitcoin will forever be just dynobucks for bad guys. Bitcoin will eventually run out, but other new cryptocurrencies have emerged based on different commodities, some of which are infinite.
Regardless of Bitcoin’s outright success, the idea of cryptocurrency has been introduced. Those who believe in it see it as freedom from government-regulated currency. It’s too early now to know whether that idea will set in, but don’t expect it to go away anytime soon.
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