If you've been anywhere in regular society in the past year or so, you would've heard mention of Bitcoin, cryptocurrencies, or perhaps the word "decentralization" thrown around a lot. But what does it all mean? What is Bitcoin? How can money be digital, what does it mean for banks, and how is everyone getting so dang rich off it?
While there is no shortage of in-depth guides answering some or all of these questions, we'll give you a layman's guide here so you can impress Beatrice in Human Resources with your tech knowledge.
If you're looking to purchase some bitcoins, check out our guide on where to buy bitcoin in your respective country.
So what is Bitcoin?
Simply put, Bitcoin is a virtual currency. The idea of a currency being virtual is not an entirely new idea. You deal with a "virtual" currency every time you make a bank transfer, with your savings information stored on a bank server.
What is unique, however, is the fact that Bitcoin is a trustless system. An in-depth look at how this works can be found here , but essentially all the computers that make up the Bitcoin network are constantly verifying the authenticity of transactions through a process called mining (which involves cryptography, hence the term "cryptocurrencies").
This is in contrast to banks, where we are trusting a central authority (the bank) to keep track of who has what, and ensure no one can spend money that they don't have. In this case, there is a central point of failure. If a hacker can get into a bank's system, he or she can take everyone's money.
"Alright, can't a hacker do the same thing to Bitcoin?"
Notice the word "central" in the last paragraph?
Bitcoin, on the other hand, is decentralized. It does not have one single server, but many servers, and thus no single point of failure. If a hacker can compromise a Bitcoin node, they would not be able to take anyone's money.
In fact, the only way a hacker could compromise the network is to compromise a majority of the computers on the network, and if they're capable of such a feat, then money is the least of our worries.
"What's this "blockchain" I keep hearing about?"
Blockchain is the technology that allows us to verify that transactions are authentic. At it's essence, blockchain is simply a shared ledger.
Imagine you had a sheet of metal, and every time someone paid you money, you engraved the transaction on the metal sheet. Eventually, you'd run out of room on the sheet, and get a new one.
But to keep your sheets in order, you punched a hole through the filled out metal sheet, and ran a chain through it, and ran it through another punched-out hole in your new metal sheet. Then when you filled out the next sheet, you'd do the same thing with a new metal sheet. And so on.
Eventually, you'd have a bunch of metal sheets, or blocks, chained together in the order in which they were filled out.
A blockchain is the same idea, except instead of metal sheets you have digital "block" of data, and instead of physical chains, we use a mathematical algorithm to connect the blocks. Pretty clever of the inventor.
"Speaking of, who invented Bitcoin?"
No one knows for sure. An anonymous individual or group known as Satoshi Nakamoto released a whitepaper detailing a "trustless virtual currency" in 2009, as well as the initial source code. While we don't know who this person / group is, there is speculation that they own roughly 1,000,000 BTC, valued at $15 billion USD at the time of writing.
"Why is a decentralized currency such a big deal?"
Well there's many reasons, but let's go over what I consider to be the big ones:
With Bitcoin (and cryptocurrencies in general), money is simply data that can be sent over the wire. There are no administrative checks, business hours, or any other of the many bureaucratic roadblocks we've come to know and love from banks. Thus, sending money with cryptocurrencies is virtually instant (in practice it's generally anywhere from a few minutes to a half hour).
Although this varies among the different cryptocurrencies, typically a transaction will only cost some cents. This is regardless of the size of the transaction. In fact, the largest ever Bitcoin transaction was $147 million dollars at the time of transfer; it was transferred instantly, and the user didn't even pay any transaction fees!
Imagine trying to move $400 million using traditional methods! The fees would surely end up in the tens of thousands.
Bitcoin is not owned by any one person or group, which means it cannot be controlled. It's a free market in the purest sense. If the U.S. goes to war, or the economy does poorly, then the strength of the U.S. Dollar goes down. But Bitcoin isn't tied to any one country, and thus provides a currency outside the control of governments (to a degree).
"How do I get some Bitcoin?"
Well you can either mine some, buy some from a friend that already has some, or check out our guide on how to buy bitcoin in your country.
"Is it risky?"
As an investment, yes. And you should absolutely do your own research before buying any cryptocurrency. But check out why we think buying cryptocurrencies is one of the best gambles you can make.
As always, make sure to research before making any investment, and never invest more than you can afford to lose.