Okay, Seriously, WTF Is Bitcoin?
We Bring You Up To Speed
“The greatest trick the devil ever pulled was convincing the world he didn’t exist. And like that – poof – he’s gone!”The Usual Suspects, 1995
And perhaps the greatest trick humans ever pulled on themselves was convincing each other that money does exist. It’s allowed us to build the world as it is today.
After all, currency exchange rates, the value of gold, even paper money itself – it’s all based on a shared belief system. Money means nothing if we don’t believe it’s real. We decide that it has value and exchange goods and services based on this value.
This brings us to Bitcoin. Over the last few years, you might’ve heard new words like “cryptocurrency” and sat there with your head in your hands. Conventional finance can already make you feel like Pacman running around his maze. Why the need for yet another way to measure your value?
You can’t see it, hold it or go to the bank and deposit or withdraw it. Most places don’t accept it as legal tender. And even though it’s decentralized, you still have to buy it through an exchange or intermediary.
Which begs the question:
What the f*ck is it even for?
We look at the ins and outs of Bitcoin.
Just tell us – what is Bitcoin?
Simply put, it’s a decentralized currency (meaning that no country oversees it) that’s entirely digital, also known as a cryptocurrency. It’s not the only cryptocurrency, but it’s the most popular and the one you’ll probably hear about most often.
You can trade Bitcoin without the need to go through a bank or institution. It’s not attached to a physical entity, like gold nuggets.
When you buy, sell, or exchange Bitcoin, the transaction details get stored on a publicly viewable database called a blockchain. The details of what you own from the transaction go into your Bitcoin wallet, essentially a digital bank account by another name (because there’s no bank involved).
The information on the blockchain includes:
- A unique identifying code for each transaction
- The date and time of the transaction
- The total value of the sale
- The names of the buyer and seller
While there’s a public code on the blockchain that confirms your ownership to everyone, there’s a private code that only you get. You cannot spend Bitcoin without the private code. This keeps it secure.
The ownership of Bitcoin is legally sticky – it’s not yet clear whether you could take someone to court to claim ownership of Bitcoin, even if you have the public and private key.
For a transaction to be added to the blockchain, most Bitcoin owners need to verify it, and the code needs to match up with a highly complex series of randomized letters and numbers.
Enter Bitcoin mining
Bitcoins are virtually impossible to steal directly because that would involve guessing these long, random, encrypted private codes. They’re verified through cryptography – extremely difficult math problems that require hardcore computing power. Bitcoin miners carry out this processing, and the code rewards them with – voila! Bitcoins!
Think of it the way Wikipedia outsources knowledge-gathering. This is the same, but with computer processing. Bitcoin isn’t a company that buys supercomputers and hires people to do the processing – it outsources these services to miners around the world. Mining both helps verify transactions in a decentralized way and brings Bitcoins into existence.
(Team Vippi will describe how mining works below – don’t worry, we know this is getting complicated.)
While hacks have taken place (just short of one million Bitcoins have been stolen this way), it’s so secure that one guy lost $220 million worth of Bitcoin because he forgot his private key. Ouch.
Anyone can see these transaction details on the blockchain, which means that Bitcoin ownership is tough to fake.
In short: Buying Bitcoin is essentially like buying stock in a company that serves no purpose other than to be currency.
Where do Bitcoins come from?
People own Bitcoins through a process called mining – essentially:
- Computers solve hugely complicated digital equations to verify transactions from one Bitcoin owner to another. These calculations are called “proof of work.”
- The “proof of work” verifies to the Bitcoin network that transactions worldwide are genuine. These transaction verifications keep the system afloat, so the Bitcoin system “rewards” the computers with a Bitcoin.
- This process brings the Bitcoin into circulation, which owners and exchanges can then trade. Imagine the blockchain as a train – the mining process adds another carriage to the train, and that carriage will have the miner’s unique public key on it.
(Bitcoin mining uses a ton of electricity, so you can’t simply create money out of thin air – you have to find access to large amount of cheap electricity to power this computer processing. A Bitcoin is essentially payment for the use of these resources to verify transactions. But it’s certainly not an eco-friendly or easy way to make money.)
There are also a finite amount of Bitcoins that can be mined – 21 million in total, as dictated by Bitcoin’s creator, Satoshi Nakamoto (without much reason – there’s plenty of theories as to why he chose 21 million, but they don’t make the system any easier to understand).
There are currently 18.6 million Bitcoins in existence, with about 900 more being mined every day. You don’t have to buy a whole one – you can buy fractions of a Bitcoin, too.
Once that 21 million is done, it’s done, and Bitcoins will only be available on exchanges like Venus, XT, and Binance.
Look, we know it’s an absolute mindf*ck. So here’s a video explaining absolutely everything you need to know about Bitcoin mining in plain English:
Why is there so much fuss about Bitcoin? A Q&A
Mindbending stories of self-made Bitcoin millionaires capture the public imagination, sure. But is it just a bubble waiting to burst? Or is there real wealth to be earned from it?
Is there really a need for it?
In some places, yes. Depending on where you live, currency can be super unstable. If you live somewhere like Venezuela or Zimbabwe, your savings will fluctuate a whole bunch along with the national currency. Even fast-food joints like KFC are accepting Bitcoin in Venezuela; such is the volatility of the Venezuelan Bolivar.
Having a form of currency outside of your country’s banking system (i.e., a cryptocurrency) means that you have some savings that aren’t affected by these peaks and valleys. It’s a pretty neat idea for this kind of situation.
For most people in most developed countries, though? You probably don’t need Bitcoin. It’s just seen as an exciting way to diversify your investment portfolio.
Is it technically a currency?
Technically, yes. It’s defined as a virtual currency. But as most places don’t accept Bitcoin as payment, it’s essentially a commodity. People make money on Bitcoin by:
- Selling when the conversion rate is in their favor (i.e., converting it back to a currency they can use).
- Leaving their Bitcoins to gain value long-term (most likely so they can convert it to a more significant sum of usable currency).
- Placing bets (in their original currency) on the conversion rate dropping, like shorting stocks. (This bet pays out – you guessed it – in a usable currency.)
What does it look like?
You’ll see a number on a screen in your Bitcoin wallet. That’s it. It’s real inasmuch as a code is stored in a publicly accessible, unfalsifiable database showing that you own Bitcoin. But you don’t get a fancy token.
Bitcoins aren’t “coins” in the traditional sense. You can’t hold them. Bitcoin ATMs are available (you can find them online), but you can’t simply have Bitcoins drop into a cash drawer like dimes at an arcade change machine.
They’d come out of a Bitcoin ATM in your local currency, converted at the current exchange rate (which sits just shy of $53,000 per Bitcoin at the time of writing – but this link will show you the official, up-to-date conversation rate).
On average, a transaction takes around 10 minutes to complete. But the processing times can range from a few seconds to a day or two.
The video below shows you exactly what a Bitcoin wallet looks like, how it operates, and ways to get one.
Can you borrow Bitcoin?
You can take out loans that allow you to put up Bitcoin as collateral—borrowing Bitcoins themselves, though? Not likely.
But also, why would you take out a loan using a currency you can’t spend?
Are all Bitcoin companies legit, and can Bitcoins be hacked?
There are no Bitcoin companies, per se – not in the same way that there’s a Federal Reserve or a CitiBank or an HSBC.
However, there are hundreds of Bitcoin exchanges, the largest being Coinbase. These work like a cross between currency exchanges and stock exchanges, allowing you to buy at one price and sell it later on, like offloading stock.
Hacking is possible in exchanges (and happened in the past to 60,000 users on one exchange) but rare. Exchanges go all out to protect their users’ funds – but then hackers upgrade their abilities, so exchanges have to recalibrate their security measures.
The trick is to bring all of your money offline as fast as you can by using a “wallet”. You should never store Bitcoin on exchanges for too long – this makes you vulnerable to breaches in their security measures.
You can store your personal key and transaction info on a software wallet (it’s not a physical wallet, where do you live, 1995?). This keeps it securely on your computer and allows you to have more control over its security. Online wallets are also available. But the more online your wallet is, the more hackable it is.
Many people have an entirely different hard drive that stays almost constantly disconnected apart from when they’re adding or selling, removing the ability of hackers to access your wallet, as there’s no live connection.
A more significant threat is phishing – people using fake emails to trick people into giving them information. You might get an email pretending to be from your crypto exchange, when in fact, they’re trying to gain access to your data and money.
Bitcoin is a more secure cryptocurrency than most, as it was the original. However, the threat of scams isn’t just in hacking.
You also want to be careful about people encouraging investment in new, untested cryptocurrencies. The “OneCoin” scam of 2016 conned eager investors out of millions by pitching a rival to Bitcoin and then vanishing.
Even the major players like Binance present an investment risk. Don’t be sucked in by promises of easy riches.
Can Bitcoin earn interest?
Technically, yes. But the primary way you earn money on is by buying it, putting it into your offline wallet, and waiting for its value to fluctuate upward.
With Bitcoin, supply and demand works similar to stocks – if the Bitcoin exchange rate starts to look volatile, people sell in droves. This drives the value and price down, which prompts more people to buy up Bitcoins, which drives their value up again.
There are “interest accounts” available through companies like Celcius and BlockFi. But these are incredibly high-risk – if they go bust (and any of them could), you’re not protected like you would be with savings in most countries that are tied to their national currency and governments. You could lose them all.
A Bitcoin glossary for dummies
Here are the terms you have to know to not sound dumb during a conversation about bitcoin:
- Bitcoin mining: The process of computers solving complex equations that brings Bitcoins into circulation.
- Blockchain: A cryptocurrency’s central database of transactions.
- BTC: The abbreviation for Bitcoin currency.
- Cold wallet: A Bitcoin wallet that stores Bitcoins offline.
- Cryptocurrency: A decentralized currency that isn’t tied to a national financial system.
- Cryptography: The use of math to keep transactions secure.
- Exchange: A platform for buying and selling cryptocurrency.
- Hot wallet: The wallet for storing Bitcoin is connected to the Internet.
- Mining: The use of supercomputers to solve equations. These equations verify Bitcoin transactions around the world and bring new Bitcoins into existence.
- Private key: A complex passcode you need for spending any of your Bitcoins.
- Public key: A public key lets you receive Bitcoins.
- Transaction fee: Bitcoin miners get a fee for processing transactions.
There’s still no guarantee you won’t get lost. Cryptocurrency is a mad world. But this should help you compute (lol) what’s going on.
Do companies accept Bitcoin for products?
Not many, but some of those that do are pretty major. PayPal, for example, is allowing U.S. customers to hold cryptocurrency in their PayPal accounts (like an exchange). If you then sell cryptocurrency via the app, you’ll have the equivalent money in U.S. dollars (worked out from the current BTC → USD exchange rate) land in your PayPal account.
You can’t, however, use the cryptocurrency to buy stuff directly on PayPal.
H3: Which companies accept or plan to accept Bitcoin?
Tesla accepts Bitcoin for their self-driving cars and solar panels now (what a time to be alive). Other companies that accept Bitcoin include:
- Fast food restaurants like Burger King, KFC, and Pizza Hut, especially in Venezuela.
- Sports teams like the Miami Dolphins and Dallas Mavericks (for halftime prize draw entries, merch, and tickets).
- Virgin Galactic (for, y’know, private commercial space flights).
- Norwegian Air.
- Gyft, an online gift card company.
- Shopify, an online store.
- Twitch, a platform that allows people to stream footage of them playing video games.
- One-off branches of stores and individual retailers, like Helen’s Pizza in Jersey City, NJ, and one branch of the CeX used game exchange in Glasgow, Scotland.
Companies change their policy all the time, but more seem to be adopting it as a legitimate way to buy goods and services with every passing year.
Who runs Bitcoin?
Bitcoin has a creator – it was made in 2009 by Satoshi Nakamoto. But he doesn’t run or operate Bitcoin. No one does. Anyone can access the blockchain (the ledger of all transactions), so public accountability keeps Bitcoin in check.
(Bitcoins can still be stolen though – see the next section if you want to feel a little bit sick.)
The system runs on mining, using the processing power of computers worldwide to verify transactions. However, the sale and transfer of Bitcoins are managed by exchanges that work kind of like Wall Street brokers.
You buy at a specific price, and these exchanges monitor how Bitcoin’s value fluctuates up and down. You can then cash out when the rate is super high or leave your money in the Bitcoin wallet in case its value grows even further.
What happens when Bitcoin goes wrong?
You’re f*cked, basically.
Bitcoin transactions are irreversible. And there’s no one overseeing or regulating your transactions. That’s an actual selling point for some buyers who value freer trading and reduced regulation and anonymity but means that you’re not covered in cases of theft or hacking.
So can people get away with Bitcoin theft? National and local authorities can prosecute thieves and hackers with grand theft and computer crimes, but there’s no way for them to prevent any theft. The Securities and Exchange Commission have started considering regulation and warning about risky cryptocurrency investments, but thefts still take place.
No one can claim a Bitcoin that isn’t theirs because it’s always publicly listed as someone else’s. Not by name, though – the public “key” code provides the ownership information, and the private “key” allows the owner to spend or trade it.
However, you can take out Bitcoin Theft Insurance, which is something.
So… is Bitcoin *actually* real, then?
How real is any currency system? Money is only real now because we’ve spent thousands of years living by it. But monetary value is only as real as we claim it is.
The real question should be: Is it worth the investment because it has a tangible effect on our lives?
If you’re in the U.S., probably not. Maybe you can buy a Tesla or Dallas Mavericks tickets. But you’re limited as to how you can use it, and it’ll only really yield benefits for you again once it’s converted back into good ol’ fashioned American dollars. If you’re in Venezuela? Knock yourself out.
At the moment, cryptocurrencies are pretty far from mainstream. They’re only helpful in real terms as a commodity that fluctuates in value. It’s basically a fancy way to tell people you enjoy gambling.
Okay. Deep breaths. It’s over now. Bitcoin is incredibly confusing, but to sum it up:
- Bitcoin is essentially a decentralized currency that cannot be duplicated or falsified due to high-level encryption and publicly stored ownership information. It’s owned, regulated, and processed by the general public. Banks, governments, and financial institutions have nothing to do with it.
- Computers all around the world solve complex equations to verify transactions. They get rewarded with Bitcoins and transaction fees.
- Bitcoins are then sold through exchanges and stored in wallets with extremely secure passcodes.
Team Vippi recommends leaving your money in more sensible places. We think this bubble’s going to burst soon. Whatever you choose, we recommend you seek professional financial advice. But at least if this topic comes up in conversation, you can have an insightful and informed discussion that’s going to impress the other person for sure.
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Budhiraja, S. (2021). $220 million worth of Bitcoin locked away as man forgets password. https://www.hindustantimes.com/trending/220-million-worth-of-bitcoin-locked-away-as-man-forgets-password-101611025805874.html
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How many Bitcoins are there? (n.d.). https://www.buybitcoinworldwide.com/how-many-bitcoins-are-there
McNamara, R. (2021). How to earn interest on Bitcoin. https://www.benzinga.com/money/how-to-earn-interest-on-bitcoin/
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