Some people have seen Bitcoin in the news, but of those, how many know what it is and how it works?
As a warning, knowing how it works has its limits. I know enough about Bitcoin to buy, sell, trade, and whatnot, but if you get down to the mathematical side of it all then I’ll have no clue what I’m doing.
My aim for this post is to clarify the basics of what it is and how it works, as well as how alternative currencies like Ethereum work.
Isn’t Bitcoin Used for Drugs?
If you’re old-fashioned. All the cool kids use Monero now.
Your bank is a middleman. Your transactions go through them, whether it’s a purchase at the grocery store with your credit card or sending money to a friend across the country (or the world).
There are a number of issues with this. For one, you don’t control your money. Your bank does. How much do you trust them? The record shows that maybe you shouldn’t.
The Solution, According to Some Geeks With Too Much Time on Their Hands
The premise of most cryptocurrencies is called the blockchain, which is a fancy word for a humongous public ledger containing every single transaction made with that currency ever. These transactions are organized into groups called blocks, which form a chain of blocks (a.k.a. blockchain).
Crypto users control addresses, which are randomly generated sequences of characters which can hold a cryptocurrency. They’re what get stored in the blockchain.
These addresses are associated with wallets, which use modern cryptographic technologies to securely maintain control of the addresses. These wallets can be software or even pieces of paper!
Quantities of the currency are generated by miners. When a transaction is made in the currency, it is broadcasted to the miners’ computers, which then process it and are rewarded some of the currency as a result. Processing the transactions is done through a crapton of mathematical work that I can’t begin to wrap my head around.
In a cryptocurrency, there is no physical item or digital file of any sort which represents an actual piece of currency. Rather, the blockchain makes a note that a certain address has received or has sent a certain amount of the currency, which compounds to a total balance of the wallet.
You may have heard of the increasing difficulty in mining Bitcoin. This is because of how many people are trying to do it; fewer miners actually get to process a transaction because so many people are trying to. Instead, the Bitcoin network is becoming increasingly centralized because a small group of filthy-rich people buy top-tier computing equipment specifically for mining (called ASIC). Since miners are allowed to charge transaction fees, these filthy-rich miners have managed to jack up the transaction fees (used to be ~1 cent, now it’s ~$10).
Possible solutions are ASIC-resilient currencies like VertCoin.
There’s also the issue of price; cryptocurrencies aren’t backed by anything (because then they’d need to be issued by a central bank, defeating the purpose) so their prices are based entirely on supply and demand. People end up treating crypto like a stock rather than a currency, which is good for people looking to make money. For people who want to use crypto for its intended purpose, it’s not so good.
The only real solution at this point seems to be a cryptocurrency issued by a central authority (like Tether, although something’s fishy about it so I won’t link it) but this defeats the point of cryptocurrencies by re-inserting a middleman.
What Are Some Coins?
You all know Bitcoin, but that’s not the only one out there.
- Ethereum isn’t so much a currency as it is a platform for apps to run off of a blockchain.
- Litecoin improves on Bitcoin in some technological manners. Mining fees are also dirt cheap (as of 2017)!
- Monero is completely anonymous, where as other currencies publicly log your addresses in the blockchain.
There’s also this thing called Bitcoin Cash, which is a currency separate from Bitcoin. It broke off of the Bitcoin blockchain in August 2017, and features technical improvements that are favored by some people (who feel some changes implemented earlier in the Bitcoin network treated the currency more like a stock than an actual currency).
How Can I Get Them?
Do you really want to?
Investing in crypto is still investing, and you can lose money. I don’t condone investing in anything because, at the end of the day, it’s gambling (if you’re going to do it, a good rule of thumb is to invest only what you’re willing to lose).
That’s All, Folks
Still got questions? Comment below and I’ll do my best to fix things up!