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OK, this is the first of our “Bonkers Explainers” and today we’re going to explain Bitcoin. I’m going to try to explain it in layman’s terms in a way that is accessible to all. Please put any feedback in the comments below.
In 2013, the world of Bitcoin was associated with greed, drama, controversy and crime as it saw dramatic rises and falls in its value. It rose from $10 right up to $1200. It even surpassed the value of gold and then slumped back to about $500. Today it is still a volatile currency, fluctuating between $380 and $682 depending upon the exchange.
Bitcoin made many millionaires in its early days and many millions of dollars worth have been seized on the Web’s black market, known as Silk Road and because of these things, few have chosen to buy the currency due to its volatility. However, these days the currency is becoming more mature and robust. Evangelists for the currency are pushing for it to become more mainstream by turning it into a currency rather than an asset or financial fad.
So that’s a little introduction, here’s what it is and how it works.
So in a nutshell, Bitcoin is the Internet’s money. It’s based on cryptography and so it’s often called the crypto-currency. The protocol that underpins the currency creates pieces of digital property that may be exchanged in such a way that a Bitcoin cannot be spent more than once, much like traditional currency.
Bitcoins are produced by open-source software that solves complex mathematical problems. This process is called mining. Each Bitcoin has a unique identity which is defined by a public address and a private key which are essentially long strings of numbers and letters. So Bitcoin is not only a token of value, it is also a method by which you can transfer that value.
When you buy Bitcoin, you are effectively buying a position in what is known as the Blockchain. The Blockchain is a public ledger and all purchases are recorded, made public and are permanent. The Blockchain is located on a distributed network of computers across the world and as such, there is no single organisation or entity such as a government which controls it. When transactions occur, they happen between two people digitally and directly without the need for a bank for example.
Since transactions occur directly, it is much more efficient, allows money to be sent and received across the world much quicker and also reduces the costs involved significantly compared with transferring traditional money.
Here are some general facts about Bitcoin:
- Bitcoins can be saved in a wallet which stores the private and public keys. Such digital wallets can be stored in a secure cloud or on a local computer
- Bitcoin is susceptible to hacking because if you lose your private key, you no longer own that Bitcoin
- You can buy things with Bitcoin through online merchants or you can cash them in through brokers, exchanges or direct buyers
So that’s our little explainer about Bitcoin, hopefully you learned something about it. Check out the video that we like by the Guardian which we think explains the concept beautifully.