The best place to learn about Bitcoin is its whitepaper. We strongly encourage you to read the whitepaper but Blockwolf will summarize some information below.
What is Bitcoin?
Bitcoin is a blockchain backed digital currency that can be transferred almost instantaneously anywhere in the world. It’s purpose is to be a secure currency independent of governments, that is easily transferrable with low fees. Some pros of it compared to US dollars are that is more secure, easier to send internationally, cheaper to send in certain instances, independent of government policy, and can be stored and transferred without a third party. Some cons of bitcoin are that it is currently more volatile than the dollar (but not all government currencies!) and is not accepted in as many places as the dollar.
How is it created/printed?
Originally in 2009, an anonymous developer under the pseudonym Satoshi Nakamoto created and released 2,625,000 bitcoins. Satoshi used an unchangeable algorithm that defines how many coins will be created and at what rate they will be created. Bitcoins are created each time a user discovers a new block. A block is a collection of transactions made during a period of time. Each time somebody records those transactions and those transactions are confirmed by other uses, the block is added to the blockchain, and the user is rewarded with a small amount of bitcoin for their recording services. This process is called mining. Bitcoin’s algorithm limits its total circulation to 21 million bitcoins, which is expected to happen around year 2140. By January 2018 there were about 17 million bitcoins in circulation.
Can the government shut it down?
Bitcoin is used on over 9,500 computers throughout the world. If a government shut it down, computers in other countries would still be able to participate in the bitcoin network, so it would be impossible to completely stop it. However, a government could ban bitcoin exchanges, but the decentralized nature of bitcoin makes it hard to enforce an exchange ban. Additionally, decentralized exchanges without physical headquarters exist, that would be very hard for a government to interfere with.
How do we know it is secure?
Every transaction is transparent on the blockchain. Once a block is added to the blockchain, it cannot be changed. Blocks are accurate because in order to process a block, the contents of the block have to be agreed upon by the entire network. A malicious block would not get approved by the network. However, if a party controlled over 51% of the Bitcoin network, they could create an invalid transaction. It is theoretically possible for parties to collectively control the Bitcoin network, but they would be financially incentivized to verify transactions honestly to receive block rewards and transaction fees instead of creating a limited number of invalid transactions.
Has Bitcoin ever been hacked? I’ve heard millions of dollars worth have been stolen.
No, the blockchain technology that supports the bitcoin network has never been hacked. However, storages, exchanges, or banks, have been hacked. Most notoriously, Mt. Gox was an exchange that got hacked and bitcoins that were on that exchange were lost. The takeaway from Mt. Gox is to be careful where you store your digital currencies. Similarly, you have to be careful with your US dollars. You should always be careful where you store your dollars and who you share your bank account information with, as there have been incidences where dollars have also been stolen or lost.
How do I safely store my crypto currencies?
The safest way to store a crypto currency is on a hard wallet, which is similar to protected USB flash drive. There are other more common options that are not as secure, like storing them on a wallet on the internet (a soft wallet), or on a trusted exchange.
What can bitcoin be used for?
Some popular retailers such as Microsoft, Overstock, Subway, and Amazon accept it in certain segments of their business. Some international e-commerce websites accept it as well. The biggest use case for Bitcoin right now is to buy alternative cryptocurrencies. It is also a better store of value than some weaker national currencies.
Are transactions anonymous?
Blocks publicly show bitcoin addresses but not the name of their users. If somebody shared their address the transaction would no longer be truly anonymous. There are other coins like Monero for example that are more anonymous.
Why can’t we just use dollars instead?
Cryptocurrencies are unique because their consensus mechanisms incentivize miners to verify transactions. For example, Bitcoin’s software algorithm is rewarded to miners every 10 minutes to help secure its network. It would be impossible to use dollars in a decentralized system because it would require an incentive to verify transactions, and only the government is able to print new dollars.
What happens after the 21 million are mined?
Bitcoin transactions include transaction fees and those fees are used to incentivize miners to verify transactions.
What is the background of the people mining Bitcoin?
Anybody with a computer can mine computer, but mining is predominantly performed by entities that own computers called ASICs (Application Specific integrated circuit) that are specifically designed for mining. Because there is so much competition to receive mining rewards, people have grouped up to mine together and share their reward proceeds. Those groups are called mining pools.
Is Bitcoin in a bubble?
It is inherently a speculative asset, but that does not necessarily mean it is in a bubble. Setting an accurate target price for it or setting a baseline price floor for it is nearly impossible because so many factors affect the price of Bitcoin and traditional evaluation metrics like discounted cash flows do not apply. The price depends on the current demand to use Bitcoin as well as the expected future demand to use it in the future. It seems like most of Bitcoin’s price is a result of future expectations, which makes it an inherently speculative asset.