You’ve likely heard Bitcoin discussed on the news recently. At one point, Bitcoin skyrocketed to $19,000 in a matter of weeks, only to plummet in value shortly thereafter (it’s valued around $8,000 as of 4/18/18). It’s not unheard of for its value to fluctuate 20-30% daily. Bitcoin will likely remain a highly volatile investment as the general public, Wall Street, and world governments come to terms with it. So what exactly is Bitcoin?
Bitcoin was invented in 2009 to be a new, purely digital currency (known as a cryptocurrency). Satoshi Nakamoto developed bitcoin as a peer-to-peer electronic cash system allowing online payments to be sent directly from one party to another without going through a financial institution.[1] Satoshi Nakamoto’s true identity is a mystery, as this name is widely believed to be a pseudonym. Whoever Nakamoto is, he or she is a billionaire. When bitcoin’s value surged to $19,000, this anonymous owner of 980,000 bitcoins was worth $19.4 billion.[2]
What differentiates bitcoin from traditional currency is its decentralized design. It is not created and distributed by a central authority, in the way the US Federal Reserve and other central banks mint and control their currencies. The bitcoin system is maintained by an open network of computers spread around the world.[3] Central banks can manipulate their currency’s value relative to others by controlling its supply. Since Bitcoin isn’t controlled by a single entity, its value cannot be manipulated by fluctuations in supply. The supply of bitcoin is tightly regulated by its underlying algorithm, only releasing a few bitcoin each hour. People can “mine” bitcoin by using specialized computers to solve highly complex mathematical equations, which verify and authenticate each bitcoin transaction. Bitcoin is the reward for performing this service, a self-sustaining incentive helping maintain the integrity of the bitcoin system.
The mechanism for recording each bitcoin transaction is also very unique. A financial institution or bank maintains a ledger of all their client’s transaction records, likely stored on a centralized computer server. However, every single bitcoin transaction is stored publicly on a massive, decentralized, and continuously updating digital ledger – collectively known as the “blockchain.” After each encrypted transaction is authenticated (in the “mining” process), the record of that transaction is added to a “block” – which is comprised of other authenticated transactions bundled together. That “block” is then added to the end of the existing “chain.”
As the “blockchain” continues building upon itself, you can’t go back and edit blocks in the chain to alter previous transactions.[4] Tampering with the blockchain is nearly impossible. To alter the target transaction, you’d have to change every single transaction that followed as well.
There are certainly some problems bitcoin’s facing (discussed in The Downside of Bitcoin), but regardless of its success or failure, “blockchain” technology has immense potential (discussed in The Future of Blockchain).
[1] Bitcoin Whitepaper, https://bitcoin.org/bitcoin.pdf
[2] https://qz.com/1159188/bitcoin-price-approaches-20000-making-satoshi-nakamoto-worth-19-4-billion/
[3] https://www.coindesk.com/information/what-is-bitcoin/
[4] https://www.cnet.com/news/blockchain-explained-builds-trust-when-you-need-it-most/