Making Sense of Bitcoin

Bitcoin entered the pantheon of interesting technologies just over 12 years ago, and while you’ve probably heard a fair amount about them, you may not really understand what Bitcoin—and other cryptocurrencies—are. Well, this month we’re going to try to give you a basic rundown of what a Bitcoin is.

Bitcoin is Digital Money

Whoa, whoa, whoa...money? 

Yes! Like many other types of currency such as the yuan, the dollar, the euro, and the ruble, Bitcoin is real money. It is what is called a cryptocurrency and it is (very) slowly becoming a universally accepted currency. Its actual value comes from its scarcity, which we’ll touch on in a bit.

Bitcoin first entered the public consciousness when the value of one skyrocketed from a relatively measly few hundred dollars to about $20,000 in late 2017. Since then, Bitcoin has garnered its own following and inspired many to seek it out for themselves.

Where Bitcoin Comes From

Here’s the thing that a lot of people overlook about money: it’s little more than a symbol to represent value, essentially an IOU from the government backing it—rather than a voucher stating how much of that government’s treasury is due to the person possessing it.

This kind of currency is known as fiat money, and is known for its economic stability.

Bitcoin and other cryptocurrencies are different. Instead of a bank or a nation backing the currency, cryptocurrencies are self-managed with their own transaction histories recorded in perpetuity.

Bitcoin is generated through “mining”—a computer processing complicated equations to generate a packet of data. The trend has actually generated shortages in high-end computer hardware and boosted demand for data centers worldwide. However, this boom has led to a much slower generation rate of new Bitcoin… the more miners seeking it out, the more Bitcoin mined successfully, and the more processing it will take to generate more.

As Bitcoin can’t really be mined on consumer-grade or even business hardware for any real return, the investment to make it work is formidable. Not only is the hardware needed expensive in and of itself, maintaining that hardware takes a lot of time and draws a lot of power. Estimates have posited that the carbon footprint used to maintain Bitcoin is in line with the carbon footprint of the entirety of New Zealand, which suggests that environmental regulations may be applied to mining at some point in the future.

What’s the Point?

The major selling point behind Bitcoin is that it is anonymized. While there is a public record of all transactions, identities remain hidden. By establishing a Bitcoin wallet on your computer or in the cloud, the wallet’s ID is then associated to your transactions.

This enables Bitcoin to be used for effectively everything from illicit goods and materials to home goods from Overstock—effectively, the merchant just has to accept them. More than anything else, however, Bitcoin has become a bit of a speculative stock market, miners seeking to make a profit by buying up Bitcoin when the value is low and selling it off when prices are high.

Is Bitcoin Risky?

Let’s make this clear: any investment, regardless of what it is in, carries with it some level of risk. Bitcoin adds a few more—your money could be deleted due to a hardware failure or a virus, and a wallet could be stolen from the cloud without any of the insurance that a bank account offers.

Bitcoin is not the only cryptocurrency by a long shot. One that has also seen a recent surge in popularity is the meme-inspired and Elon Musk-promoted Dogecoin… almost strictly because Musk tweeted about it.

Look, nobody said that cryptocurrency makes sense.

Have you considered cryptocurrency as a potential investment? Tell us why or why not in the comments!