Bitcoin has dropped some of its value in the last couple of weeks.
Hence, this is the perfect time to come up with an explainer which sheds some light on the very basics of Bitcoin.
Bitcoin has once again weathered a wrenching selloff.
In other words, it has fallen from a high price of around $19500 to slightly below $13000.
All of this took place within a week.
There is no doubt about the fact that Bitcoin has registered some astonishing gains in recent months.
Remember, that a single Bitcoin was actually worth slightly less than a single dollar back in 2011.
But Bitcoin has made a bit of a reputation for quickly gaining value and then losing it.
After recent mammoth gains and subsequent decline, many people are starting to wonder if it is worth it to pay attention to a technology like Bitcoin.
The cause of that wonder is, of course, Bitcoin’s unstable nature.
There is no point in discussing if Bitcoin has arrived yet or not.
Almost everyone in the modern world has heard of this new cryptocurrency Bitcoin.
Yet, there are a ton of people who don’t grasp the details that come with Bitcoin.
It’s all a bit fuzzy in their head.
What exactly is a Bitcoin?
And how can you buy some of this Bitcoin?
Moreover, what are the uses of Bitcoin?
To answer all these questions, we have decided to help you.
In this article, we will talk a bit about what Bitcoin is and how does it work.
And why ordinary people would do themselves a favor in knowing more about this technology.
So What’s A Bitcoin?
When we say what is a Bitcoin, we basically want to know what does the term Bitcoin refers to.
Right now, we would like to tell you that this term represents two different things.
Just like MasterCard, Bitcoin is actually a payment network.
MasterCard is a more established payment network though.
Along with that, the term Bitcoin sometimes also refers to the actual currency of this Bitcoin network.
Think of it as another payment method such as Mastercard makes use of dollars while in the United States of America.
So how is MasterCard different from Bitcoin?
Or vice versa?
What makes Bitcoin, to some, better than Paypal and all the other hundreds of payment networks that exist now?
Bitcoin came onto the scene in 2008.
This is the time when someone or some group with the name of Satoshi Nakamoto invented Bitcoin.
Back in 2008, Bitcoin became earth’s first online payment method that had a completely decentralized network.
For those who don’t know, Mastercard Inc operates the payment method known as MasterCard.
The other interesting thing you need to know is that you won’t see any Bitcoin Inc that is in charge of the cryptocurrency known as the Bitcoin network.
Bitcoin is essentially a peer-to-peer network.
Bitcoin also maintains a, kind of, shared transaction ledger.
The Bitcoin community calls this transaction ledger as blockchain.
But could we have done without a new currency?
Afterall, just a new payment network would have proved enough for a lot of communities.
As mentioned before, the Bitcoin network is fully decentralized.
And a consequence of that fact is the invention of a brand new currency.
Some like to think it as unavoidable from the start.
Let’s talk about how a conventional payment network works.
And how Bitcoin is different.
Basically, you have a network.
And then you have its owner.
The owner of the network promises the users of the network to redeem their balances for dollars and/or euros or any other conventional currencies.
We have already mentioned the fact that there is no Bitcoin company.
That may sound very liberating.
But all that really means is there is actually no one who can guarantee that any Bitcoin balance would have any specific value.
So what happens instead?
Well, the value of Bitcoin usually floats.
It floats against conventional currencies.
In other words, the community determines the value of Bitcoin via economic principles as simple as supply and demand.
This is also a great time to mention that:
No. The physical representation of Bitcoins that users usually see spread all over the internet in pictures isn’t really what a Bitcoin looks like.
Think of Bitcoins representing just simple entries in the above-mentioned Bitcoin blockchain.
So if Bitcoins don’t come in the form of those pictures (a coin with B written on it) then how does it really look?
How would you know if you own some Bitcoins?
Well, if a user has Bitcoins then that means the user has some cryptographic keys which are private in nature.
These keys are stored on the user’s computer machine.
The user can also choose to store these private keys on an external drive.
Some users like to print out these cryptographic private keys on a simple piece of paper and then store it somewhere.
Somewhere where it is safe.
Because these cryptographic private keys allow users to spend whatever they want from their Bitcoin balance.
These keys in a pretty similar way to a password.
Usually, we use a password in order to access our bank or bank’s official website.
The bank’s website then enables us to spend some of our balance that we have in that bank account.
Here is where Bitcoin becomes a little different from conventional currencies and banks.
Users can’t really withdraw a specific amount of Bitcoins from the Bitcoin network the way they would withdraw a conventional and physical currency from their bank.
That is really it as far as Bitcoin is concerned.
You don’t really need to know much more.
With that out of the day let’s ask another simple question and then answer it.
We Have Said That Bitcoins Are Not Tied To Any Conventional Currency. Then Why Are They So Valuable?
First of all, that’s a very good question.
We have already mentioned that when Satoshi Nakamoto created the Bitcoin network back in the year 2008/2009, Bitcoins didn’t have a lot of worth.
Hardly any, in fact.
But let us describe a bit more of that Bitcoin lore.
It still holds that indeed the first Bitcoin transaction in the real world occurred sometime in May of 2010.
This is a time when one really early Bitcoin user managed to buy two full pizzas for around 10,000 Bitcoins.
If we do the math, then the value of Bitcoin back then came to a little less than a penny.
Naturally as the number of users making use of Bitcoin grew in number so did the value of the currency itself.
It kept climbing.
And by the time most “experts” on the internet started to pay attention to Bitcoin (this was around 2011) the value of Bitcoin had climbed to around $1.
Experts also believe that this marked the beginning of the first huge Bitcoin bubble.
New users poured in to buy and sell Bitcoin because of a massive amount of media coverage.
This also caused the value of the cryptocurrency to rise.
And thus continued the cycle.
The higher the price went, the more media interest Bitcoin attracted.
And by June 2011, the value of Bitcoin rose to around $30.
Ok, that’s great. But then what happened?
Then came the crash.
In other words, the value of Bitcoin went from $30 to $2 before everybody closed off the year 2011.
But Bitcoin has gone through several more crashes.
The cycle of rise and crash repeated around two more times.
Both in 2013.
By the end of May in 2013, the value of the cryptocurrency went beyond $250.
But only briefly.
It quickly fell down by around 80 percent.
The cryptocurrency again jumped back up towards the end of 2013 and rose to a price that went above $1000.
And then it crashed again.
This time, by another 80 percent.
Currently, we are in the middle of another boom.
This boom has lasted much longer though.
In other words, this boom has taken the value of Bitcoin from a low of $200 in the early part of 2015, to a high value of more than $10000 in recent weeks.
Experts consider this as the fourth major boom as far as Bitcoin is concerned.
How did these booms work?
Or more generally, how do booms really work?
If we look at the history of these booms, or any kind of bubbles for that matter, we should no problem in identifying the same factors that drive these booms.
What are those factors?
Well, think of the factors as a loop.
And that loop is:
This is the feedback loop we need to concentrate on.
And most internet writers have seen this publicity-price feedback loop process first hand.
When the price of Bitcoin is rising, one can attract a lot of traffic by simply writing about Bitcoin.
Hence, reporters like us basically write articles like the one you are reading right now about Bitcoin.
People read these articles.
And inadvertently allow the currency to attract more attention.
It is also true that a lot of folks who read articles about Bitcoin tend to buy them as well.
When they do, this pushes Bitcoin’s price upwards even more.
And as soon as that happens, Bitcoin triggers more media attention.
More media attention means more media coverage.
And more media coverage leads to more interest from the public.
This is actually a bootstrapping process.
And it has managed to achieve something that many experts in the field would not have thought possible just a decade ago.
What is that achievement?
A valuable cryptocurrency.
A currency that can live without commodities such as gold or silver backing it up.
Moreover, a currency that does not need a powerful institution to back it up.
This basically sidelines players such as banks and governments.
A certain section of the community believes that the value of Bitcoin is rising for one simple reason:
More and more online users are actually betting that Bitcoin’s value would continue its upward trend over time.
And raises another obvious question:
Are they right about that?
With that, we’ll come to the final question for the day.
Why Would Anyone Want to Use Bitcoin?
If we can give our honest thoughts, then it is true that you probably don’t need to use Bitcoin.
That is if you are a regular American consumer.
We can’t blame Bitcoin though.
Bitcoin startups all over the country have exerted years of effort but have not managed to find success in building payment applications.
That is, payment applications that regular folks or ordinary American consumers find interesting and want to use.
Now, there are a lot of options when it comes to discussing applications for the official Bitcoin network.
One of those applications is indeed international money transfer.
We already have Moneygram and Western Union, which work like conventional financial payment networks.
But they are expensive.
More importantly, though, they often consume a long amount of time before they allow the money to go through.
Theoretically speaking, a money transfer system based on Bitcoin could offer faster and cheaper payment network.
In practice though, the situation is different.
The cryptocurrency has struggled to gain much traction when it comes to functioning as a good platform for remittances.
Why is that?
There are many reasons.
You can probably understand one of those reasons if you look at Bitcoin ATMs and what they charge for a transaction.
Bitcoin ATMs do enable people to exchange their Bitcoins for cash and vice versa.
The problem though, is the average transaction fee that these bitcoin ATMs charge.
According to a website that keeps tracks of these numbers, a Bitcoin transaction could cost users around nine percent if they are buying Bitcoins.
And if they are selling them then the transaction cost can reach six percent.
Hence, if a user wants to send some money to another country or anywhere overseas to a family member or friend via Bitcoin ATM machines then they could end up paying a high amount of transaction fees.
One source says that the transaction fee could rise as high as around 15 percent.
This ATM fee is in addition to the fee that the mainstream Bitcoin network will charge the user itself.
Historically speaking, that fee always remained quite low.
But it too has risen rather rapidly in the last couple of weeks.
For example, last Thursday, the daily average Bitcoin transaction fee on the mainstream Bitcoin network reached a record high of $50.
As you can probably imagine, Bitcoin people have to bring this price down.
And Bitcoin insiders have already started their work in an attempt to bring the price down via various new schemes.
Those measures will, of course, take some time to have an effect.
And until that happens, one would really have to try hard to imagine a future where mainstream applications using Bitcoin gain any sort of meaningful traction.
The good news is that several companies are working hard in order to improve the Bitcoin experience when it comes to making international money payments.
This is especially true for regions such as Asia.
There is little doubt that it is only a matter of time before companies will figure out new ways to make Bitcoin payments fast.
And of course affordable.
With that said, they do need to hit a specific critical mass.
And they haven’t hit that level yet.
Bitcoin enjoys special popularity when it comes to illicit transactions.
But that doesn’t apply to the vast majority of ordinary people living in a rich Western country such as the United States.
You probably don’t have to use Bitcoin if you don’t want to speculate on the currency’s future value or buy drugs.
Right now, Bitcoin doesn’t have much to offer such people.
But we can’t say the same for the future.