What are Bitcoins
If you know about the internet, you may have heard someone say bitcoins sometime within the last eight years. Recently, one bitcoin became 2800 times more valuable than one dollar. A few months before this, one bitcoin was only 700 times more valuable than one dollar. Why has it gained so much momentum? Trust. Money is quantified trust. More people trust bitcoin now than ever. More people trust internet money now more than ever. So what is bitcoin and why do people trust it 2800 times more than a dollar?
Bitcoin is Decentralization
The biggest difference between bitcoins and traditional money is the idea of decentralization. Money that is connected to one source who sets the rules, like the United States Dollar, is known as centralized currency. Everyone who uses a dollar agrees to abide by the rules set by the Federal Reserve (take out a dollar and read that it is actually a Federal Reserve Note). Every time you use money, your just passing notes. These notes are from the Federal Reserve and written by the Federal Reserve using rules set and regulated by people acting on behalf of the Federal Reserve. If you don’t like their rules, you can only change it by becoming a member of the Federal Reserve. This central agency sets the agenda on the United States Dollar. This is necessary because the dollar has not been tied to a tangible good, like gold, since 1971.
Stop when he says “Illuminati.”
Bitcoins are a form of decentralized currency. There is no one group or person that sets the rules for bitcoins. This allows for great transparency. Bitcoin uses a technology known as the blockchain to keep a public record of every transaction that has ever occurred using bitcoins. This public record is stored on computers. Any computer. You can download a list of every transaction that has ever taken place. As a matter of fact, you can use your computer to validate transactions and add them to the public record. Because everyone can be a part of this process, see any transaction, and literally make money by doing this, there is more trust to be found in decentralized currency, 2800 times more trust (so far).
Decentralized currency also has another positive: there is not one central agency that gets to distribute currency and regulate the supply. Instead of printing bitcoins, they are awarded to individuals who supply the network with the computing power necessary to process transactions. You can install an application on your computer that allows it to receive transaction information, verify this information with other computers in the network, and write it to the public record. If you do this long enough with a powerful enough machine, you will receive bitcoins for your time and effort. This is known as mining bitcoins and it is how new currency enters the network. Your computer works for the network and your computer gets paid by the network. So what are bitcoins? Bitcoins are a representation of enough computation to verify that the bitcoins you say you have are the same bitcoins everyone else thinks you have. Bitcoins are quantified trust.
Bitcoin is a Cryptocurrency
Bitcoin is simply the first and most valuable cryptocurrency today. Cryptocurrencies are what the internet calls decentralized currencies, which is in its infancy. As the idea gains more popularity amongst merchants, investors, and consumers, more of them will appear. There are thousands of them out there, but they are similar in that they function as a token of a computer process that has taken place publicly; they utilize blockchain technology to make a safer monetary system.
The value of cryptocurrencies come in their transparency and the value that transparency plays in trust. The United States Dollar is a unit of measurement of trust. The value of the dollar is equal to the amount of trust the average American has in the Federal Reserve to decide what’s right for all of our money. What one dollar buys you is directly linked to U.S. citizens belief of the process the Federal Reserve uses to create monetary policy. Cryptocurrency is very different. What one bitcoin buys is equal to the amount of trust the average bitcoin miner has in the entire bitcoin community to decide what is right for all of us. The conversion rate from BTC (bitcoin) to USD (United States Dollar) is also how much more trust we have in all of us being able to make a good decision for all of us as opposed to a small group of us being able to make a good decision for all of us. Today, bitcoin miners believe in all bitcoin holders 2800 times more than U.S citizens trust the Federal Reserve. Ethereum (ETC), another cryptocurrency, holds 245 times more trust than the USD. Litecoin (LTC) holds 36 times more trust than the Euro.
Trust is Power (and power is money)
Recently, people have been making money using cryptocurrencies in a few ways. First, you can mine if you have the means to do so. All you have to do is download the software and keep your computer on. In order for this to be profitable, you need a pretty beefy machine, or a cryptocurrency that is in the very early stages of being mined, preferably both. There are companies with machines dedicated to mining cryptocurrency 24/7 that process a significant portion of all transactions and reap enormous rewards. Mining one block of bitcoin will net you 12.5 BTC (bitcoins), which as of this writing is worth $35,000. If you have a powerful computer, you can join a mining pool, which are groups of people who use their computers together to mine blocks and share the profits.
The most popular way to make money on cryptocurrencies is as an investment. Just like the stock market, you can choose who you think will be successful in the future, how much you want to bet on them, and watch your money grow or spin clockwise down the toilet. The cryptocurrency market has been very volatile to say the least. Because so many people have been learning about Bitcoin and other cryptocurrencies every day, the amount of trust, and the market, has been fluctuating wildly. At some point in the future, people will solidify their opinions on cryptocurrency and the price will stabilize into an investment you can form a concise opinion on.
While many may miss out on the Bitcoin boat, it is certainly worth watching. We don’t know if this is a Titanic or an all-expense paid trip to retirement. For some people, it has already been those. For the rest of us, we should understand that Bitcoin is only one cryptocurrency of many that will be emerging in the future. Unfortunately, this one is the first and many people will judge the success of the others based on its performance. If it goes well, expect others to go the same way. If it doesn’t go well, pay attention to why and see if anyone is trying to correct this. At the core of this experiment in monetary policy is a technology, the blockchain, that might be best used in a scenario someone hasn’t invented yet. Either way, it will be an interesting rollercoaster to watch.