What is Bitcoin? What the hell is Bitcoin? What the F%$k is a Bitcoin? These are pretty common questions right now in the mainstream public, you’ll see them asked in Facebook comments, at dinner parties or just standing at the urinal.
So, it’s about time we broke it down in the simplest of terms for you. For the hard core nerds, click away, this ain’t for you. This is for everyday people, wanting to get some sense of this whole craze and try and participate a bit more in the conversations around the watercooler (or wherever else)
Here’s my story about the Bitcoin Pizza which includes some explanation from my radio show Talking Technology:
What is Bitcoin?
Great question – and one of the hardest we have to answer in the tech world quite frankly.
Bitcoin is a digital currency – known as a “Cryptocurrency”. There is no physical coins or notes, instead there are digital signatures in what’s known as a “block chain”.
Essentially – a Cryptocurrency like Bitcoin is a mathematical problem, one that takes powerful computing power to solve. Every time part of the problem is solved, a small digital signature is created as a reward. That reward is known as Bitcoin (there are MANY other Digital Currencies like this, Bitcoin is just one).
The process of solving that problem is called “mining”. Importantly, there is only a limited supply of “rewards” or Bitcoin from that maths test – the solutions are not common, they do not grow on trees. The total supply of Bitcoin will reach 21 million at some stage in around 2140 most experts expect.
How is it “mined”?
Being a complex mathematical problem, it requires great computing power. This is where some of the critics of Bitcoin aim their barbs. Companies and individuals are setting up “Bitcoin mines” – huge banks of computers, warehouses of them in some cases, to crunch the data in the hope of a Bitcoin.
Given a single Bitcoin is now worth over $20,000 AUD, there’s a fair reward if you can create the computing power to do it – though, that computing requires actual power, thus the mining of bitcoin is actually a drain on our power grid.
If you setup your own computer to mine Bitcoin you’d probably have buckleys chance frankly.
Who controls it?
No-one. There’s no record of who created it, there’s no central organisation responsible for it. It’s an open equation ready to be solved.
If Governments banned Bitcoin it would have no effect, because a computer in Kenya could mine Bitcoin and claim the “reward”.
When you invest in the Stock Market there are very clear rules why which those trades must take place, and also how the companies listed on the Stock Market must behave and report.
Bitcoin is the ultimate in transparency though, because every action forms part of a public register. Every new Bitcoin forms part of the “block chain”, and every transaction where someone trades Bitcoin is recorded on the ledger.
However, there is no register of ownership either. Reports of individuals own holdings are made through public disclosure, no individual bitcoin is ever linked specifically to a persons name within that public register.
Where do you keep Bitcoin?
In your wallet of course! Well, that’s where it gets a bit complex. A digital wallet is just a line of code on a computer, which requires a complex password to “open”. In the early days, Digital Wallets were kept stored on your computer, as a file, one you can open with the right code. There are many, many reports of people who have Bitcoin in a Digital Wallet that sits on a hard drive or USB stick that has since been lost or thrown away. Potentially losing millions of dollars worth of Bitcoin.
Today, there are many wallet services begin setup online, allowing you to store your Bitcoin in an online database – simpler, yet also risky – in a world of hacking, nothing is a bigger target than something that holds actual value – like Bitcoin.
Why is it going up in value?
Impossible to really know. The limited supply, the hype, and the genuine demand around the world is driving up the trading volume, which in turn is pushing up prices.
The price chart over the last twelve months has been intense, insane in fact. Growth like no other investment possible.
However, it should also be noted, it can, does and could drop rapidly at any point.
Should I put money into Bitcoin?
If you have a large investment portfolio, and take risks on small companies on the stock exchange which are trading at 10c hoping they get to 15c in the near term, then perhaps this is your style of investment. But it would be unlikely you’ll ever find a financial adviser who would want to see you put a large percentage of your investments into Bitcoin.
Do you gamble? Love a punt? Then you know that a horse can run last despite being the favourite. You also know that you can win big on a horse that no-one expected. Bitcoin is about as certain as punting.
So if you’ve got some cash you don’t mind losing, then maybe it’s worth a punt – but you’d be mad if you risked your home or life savings on something so volatile.
There have been many Bitcoin millionaires made – and there will be more. But each of them risks losing it all if they don’t cash out. They also risk the feeling of regret if they do and it goes higher. That’s what makes it such a risk.
How do I buy Bitcoin?
It’s not easy. At all.
There are websites selling services to trade Bitcoin, but which ones do you trust? We’ll look into this more in the coming weeks, for now, I’ve used Bitcoin.com and Cointree.com.au – I am confident that the trades are legitimate as I can verify the wallet value independently of those sites.
Are the fees and charges competitive, almost impossible to know. To buy Bitcoin I’ve needed to take photos of myself with my credit card, my passport, and even do face to face bank deposits to get it done. None of which are user friendly or low risk.
What next for Bitcoin?
If or when the bubble bursts, expect Governments to attempt to intervene – they can’t stop it, but perhaps they can in some way regulate trading, regulate the buying process to give confidence to buyers and some level of protection for those trading. But regardless of what they do, they can’t actually change what it is or how it works.
It’s a runaway train and we’re all on board as the media continue to follow it and stories of buyers, sellers and losers become more regular.