5 Most Frequently Asked Questions About Bitcoin
What is Bitcoin?
Bitcoin is the most well-known and established type of digital currency. Enabled by new technology called the “blockchain”, cryptocurrencies are a type of payment network that use peer-to-peer validation through a shared transaction ledger. The network isn’t owned by anyone, so you can’t call a company or ask the government for information. A global network of computers solve intricate mathematical problems that validate each transaction in the chain which is where the term “block” comes from. Because the system validates both ends of the accounting ledger, a new form of digital currency was born. Spending occurs when one person transacts with another through the digital transfer of bitcoins.
You may see pictures of coins with a bitcoin symbol stamped on them, but make no mistake, bitcoin and other cryptocurrencies are purely digital. Some are postulating that cryptocurrencies and blockchain technology could be the ultimate disruptor of global economics.
Why & How was Bitcoin Created?
Bitcoin was born out of the financial crisis as an alternative to a broken financial system. In addition, fiat currencies which are created by governments and Central Banks around the world have distorted the global markets. Traditional currencies like the US dollar, through the Federal Reserve, create money pretty much out of thin air to enable a spend-thrift Congress. While citizens hope for accountability from their government, history has repeatedly shown that fiscal responsibility isn’t very high on the agenda of politicians in the US and around the world.
Each bitcoin is created through a digital “mining” process on a computer. A complex mathematical equation is solved, created new “blocks” on the online blockchain ledger. The mining process gets more difficult with each new entry, maintaining a limited supply of available bitcoin. The original code for bitcoin has a hard limit of 21 million bitcoins possible. There are roughly 17 million mined and in circulation now.
How can Bitcoin have any Value?
Like anything else, market supply and demand control a cryptocurrency’s value. The mining process limits the rate at which new “coins” are created, and the total supply has a hard limit as well. The various cryptocurrencies all have unique algorithms that all work a little bit differently, but the general idea is that mathematics and computers control the currency supply instead of politicians and governments.
Many people ask how bitcoins can be worth anything when they are just a blip on a computer, backed by nothing. What those people need to be reminded of is that dollars today are also blips on computers backed by nothing. Only about 10% of our money supply exists in physical form, meaning there are not actual paper dollars and cents behind the money in your bank account. Our dollar’s value is backed by the faith and credit of the United States Government.
Who Accepts Bitcoin?
More and more merchants are accepting bitcoin as an option, though. The first pizzas were sold for bitcoin in 2013 for 10,000 bitcoin. That was about $40 back then. Those bitcoin are worth over $1.5 million today, making those the most expensive pizzas ever sold!
Many major online retailers accept bitcoin, including Overstock, Expedia, Newegg, Wordpress and Microsoft. Even Subway accepts bitcoin! More retailers are being added to the list all the time. Will we start to see more and more “Bitcoin Accepted” logos around us? Maybe with discounts and incentives to encourage the use of bitcoin?
Future of Bitcoin
The blockchain in itself is fascinating new technology that has many potential applications besides keeping track of digital transactions. It should be possible in the future to use the blockchain to settle real estate transactions and other legal contracts.
Bitcoin has already had a hand in alleviating poverty and oppression around the world. Consider the story of Roya Mahboob who has helped hundreds of Afghan women, prevented from having their own bank accounts, start business and gain economic empowerment through bitcoin. Consider the many starving Venezuelans escaping the tyranny of hyperinflation by mining and trading in bitcoin. Because of its decentralization, bitcoin has disrupted oppressive governments and societies already. Could bitcoin and cryptocurrencies be the key to human freedom in the future? If it is, you, as an investor, could be an integral part of that.