Bitcoin for Dummies: Understanding Cryptocurrency

Bitcoin for Dummies

There are buzzwords that come around every few years and work their way from a small subculture to domination within the mainstream. The terms blockchain and Bitcoin have both followed this trajectory as they have evolved from a nerd fantasy to the talk of CNBC. If you are new to the world of cryptocurrency, you may benefit by a quick look at “Bitcoin for Dummies.”

An Introduction to Blockchains

The first thing to understand is what blockchain is, because that is the root idea that Bitcoin is built upon. Any “Bitcoin for Dummies” must cover the idea of blockchain technology and what it means. The best way to think about blockchain is as an unbiased record of the transactions that have occurred in the past. Like a log of all the withdrawals and deposits made at every bank, but where you could only see an account number and not a name on the accounts.

So when you have this unbiased record that can tell anyone what transactions have occurred, it becomes very hard to scam the system and tell it that you have more money than is true. There is a log the system can check that has proof of how much money you have. And the best part is that this log is stored on every computer that is participating in the network, so there is no way for someone to beat the system without hacking every computer at once.

This goes to the idea of a decentralized system for managing financial resources. Blockchain technology makes it possible for there to not be a single entity (e.g. banks or Paypal) that are managing all of the transactions that occur. For some people who trust the banks or major entities, they view this as a bad thing, but many participants are wary of the ethics and stability of a central entity and would rather a system guided by clear rules and laws rather than the judgment of regulators and banks.

Bitcoin for Dummies

So this idea of decentralization is enabled by blockchain technology, and one of the first uses was to develop what we now call Bitcoin. Bitcoin is a cryptocurrency – meaning it is a digital currency that is guided by encryption techniques for the generation of new coins – that is by nature decentralized. For some of the less trusting people in our world, this is a huge benefit. They love that it isn’t controlled by anyone because of their libertarian beliefs.

The final thing to understand about Bitcoin is that it is mined by anyone who is willing to put their computer to work on a difficult mathematical problem. These problems require the investment of computing resources and are essentially a “proof-of-work” for the world that shows the investment of resource in order to gain a Bitcoin. This mining process is a natural by-product of a world where there are no central banks to issue the money. The actual participants in the network get to issue the money and gain based on how much resources they invest in the process.

The beauty of this decentralized system is that you are no longer just dealing with single transactions. You can scale out this level of trustworthiness to the whole world. If you remember the time where people were still afraid to put their information on the Internet, you realize this was not that long ago. Only recently have we begun to trust the Internet with our credit card information and other payment details, and that mostly applies to major credit card carriers or vendors. With the adaptation of something like Bitcoin, it would be possible to trust anyone because the record is visible to all and your fear of getting ripped off becomes greatly reduced.

In the long-run, there are two major possible uses for Bitcoin. It can either be adopted as a store of value, or it can turn into a commonly accepted medium of transaction. Paypal accomplished the latter goal and is what most people use for their online transactions, but if Bitcoin can accomplish both of these goals, it will capture the online market and change the way business is done.

Beyond Bitcoin for Dummies

No Bitcoin for Dummies article would be complete without mentioning that there are many other cryptocurrencies out there. Not only do you have to understand what Bitcoin is, but you should develop an idea of why you think Bitcoin is better than other options like Ethereum or Zcash, which both have their own pros and cons.

For many, they view cryptocurrency as an inevitability but aren’t sure which will be the dominant coin. This is much like the Internet boom of the late 1990’s where everyone knew the world was changing, but no one knew which would be the next Google. This creates two options: you can either invest all your money in the coin you think will triumph, or you can create a portfolio of coins and count on a more balanced approach.