A pile of bitcoins

What is Bitcoin?

Short Summary: Bitcoin is a currency, just like the Dollar, Euro or Yen.  It is the first digital currency that is decentralized, meaning it operates on a network with no central authority.  According to the Bitcoin website, “Bitcoin is an innovative payment network and a new kind of money.”  Think of it like cash for the internet.

Long Explination: Released as open-source software in 2009, Bitcoin is a peer-to-peer digital payment system and cryptocurrency. Transactions take place between users with no middleman or  intermediary, such as a bank.  One of the major selling points of using Bitcoin as a currency is that it will be faster and cheaper than traditional currencies.  For example, Bitcoin is generally faster (a matter of minutes as opposed to several days) and far less expensive (pennies as opposed to large fees or a percentage of the transfer) when comparing international transactions.

Transactions are verified by network nodes – computers on the network. These nodes are rewarded with small amounts of Bitcoin, which is referred to as mining.  Once verified, they are recorded on a public ledger called a blockchain.  The blockchain is a distributed database that is used to maintain a continuously growing list of records, called blocks.  For a better understanding of the block chain, watch this three minute video:

What Gives Bitcoin Value?

Let’s take a quick look at the American dollar and see what gives it value so we can compare it to Bitcoin.  It used to be the case the value of a dollar was tied to the value of gold, also known as the “gold standard”.  Now the dollar is basically “fiat money”, meaning that it holds value simply because people have faith that other parties will accept it. Most importantly, in order to pay taxes in the United States you need dollars.

Let’s compare that with Bitcoin.  There are a number of aspects to Bitcoin that give it value.  First, Bitcoin acts as a currency.  You can use it anywhere in the world to buy and sell goods and services.  Even thought it has not been widely adopted yet, here in Las Vegas I can still use it to go out to eat, stay at a hotel, and go shopping.  The number of venues accepting Bitcoin is small but is growing every day.  As a currency, Bitcoin is transparent and secure.  Many predict that Bitcoin will be widely accepted to the point of using it just like money on a credit card.  In fact, there are debit cards in use today that draw from Bitcoin accounts.

Bitcoin is also like an equity, with the value growing as it becomes more widely accepted.  There will only ever be 21 million Bitcoin in existence.  The idea of scarcity coupled with a very active market helps drive the price up.  Like gold, many people strongly believe that Bitcoin will be a valuable item to have in the future.  Supply and demand does the rest.  A different way to look at using Bitcoin as a store of value is through the eyes of someone who does not have access to a stable financial system.  Consider those in countries where the value of the local fiat currency is far less reliable then the dollar or euro.  Bitcoin is a great alternative to the local currency under these circumstances.

Finally, Bitcoin has value because people use it.  The more people adopt it, the more value it will have.  This phenomenon is called network effects and will have a direct impact on how it is used as a currency.

How Are Bitcoins Created?

A process called “mining” is what creates new Bitcoin.  Special computers run an algorithm to verify transactions being made on the blockchain.  The reward for verifying transactions is a small number of Bitcoin.  The way Bitcoin is setup, mining will get harder and harder to do over time until around year 2140.  At that point all 21 million Bitcoin will be in circulation.

Where Do You Buy Bitcoin?

Imagine you want to buy some foreign currency.  Most likely you will walk into a bank and buy some using cash or an account.  Bitcoin works a little differently at the moment.  For now, you have to create an account on an exchange or direct deposit platform.  There are a number of different exchanges to choose from, each with their own pros and cons.  A good place to start is Coinbase located in San Francisco, California.  It is easy to use, has a good reputation and is insured.

How Do You Trade Bitcoin?

Let’s talk trading. Supply and demand determine Bitcoin’s value.  The various exchanges track that supply and demand.  Traders create accounts on the exchanges where they use fiat currencies and other cryptocurrencies to buy and sell.  Yes, people are making a lot of money trading Bitcoin and other cryptocurrencies.  Day traders gamble on the volatility of a very unpredictable market.  Others buy coins that they believe in and hold them for the long haul.  This is what I’m doing with the cryptos that appeal to me the most.

I am in no way, shape or form an experienced investor.  However, it was easy enough to create an account, get verified and purchase Bitcoin.

Is Bitcoin Safe?

Bitcoin as a currency and platform is very safe.  For example, just like cash, a transaction does not require any personal information.  The wallet containing your Bitcoin is typically kept on your computer or an online wallet and is also very safe.  News stories you see about people losing money to hackers is almost always dealing with an exchange that has been hacked.  It is also very important that you keep the information pertaining to your wallet safe.  If you were to lose the information required to access your digital money, it is the same as losing cash out of your pocket.

Here’s another video that goes into further technical detail on cryptocurrencies:

More Information:

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