What Is Bitcoin?
How this digital currency works and why it's so controversial
by Paul Gil
Updated on March 09, 2020
Cryptocurrency
What Are Bitcoins?
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Bitcoin is a virtual currency that gained recognition after its price-per-coin rose above $13,000 in early 2018. The cryptocurrency (one of many) is at the center of a complex intersection of privacy, banking regulations, and technological innovation. Today, some retailers accept bitcoin, while in other jurisdictions, bitcoin is illegal.
Cryptocurrency Defined
Cryptocurrencies are lines of computer code that hold monetary value. These lines of code are created by electricity and high-performance computers.
Cryptocurrency is also known as digital currency. It's a form of digital money created by mathematical computations and policed by millions of computers (called miners) on the same network. Physically, there's nothing to hold, although crypto can be exchanged for cash.
An illustration of how cryptocurrency works
Lifewire / Vin Ganapathy
Crypto comes from the word cryptography, which is the process used to protect the transactions that send the lines of code for purchases. Cryptography also controls the creation of new coins. Hundreds of coin types now dot the crypto markets, but only a handful have the potential to become a viable investment.
Governments have no control over the creation of cryptocurrencies, which is what initially made them so popular. Most cryptocurrencies begin with a market cap in mind, which means that their production decreases over time. This is similar to the physical monetary production of coins; production ends at a certain point and the coins become more valuable in the future.
What Are Bitcoins?
Bitcoin was the first popular cryptocurrency. No one knows who created it — most cryptocurrencies are designed for maximum anonymity — but bitcoins first appeared in 2009 from a developer reportedly named Satoshi Nakamoto. He has since disappeared and left behind a bitcoin fortune.
Because bitcoin was the first major cryptocurrency, all digital currencies created since then are called altcoins, or alternative coins. Litecoin, Peercoin, Feathercoin, Ethereum, and hundreds of other coins are all altcoins because they are not bitcoin.
One of the advantages of bitcoin is that it can be stored offline on local hardware, such as a secure hard drive. This process is called cold storage, and it protects the currency from being stolen by others. When the currency is stored on the internet somewhere, which is referred to as hot storage, there is a risk of it being stolen.
On the flip side, if a person loses access to the hardware that contains the bitcoins, the currency is gone forever. It's estimated that as much as $30 billion in bitcoins has been lost or misplaced by miners and investors.
Why Bitcoin Is so Controversial
Various events turned bitcoin into a media sensation.
From 2011 to 2013, criminal traders made bitcoins famous by buying them in batches of millions of dollars so they could move money outside of the eyes of law enforcement and tax collectors. Subsequently, the value of bitcoins skyrocketed.
Illegal financial transaction
krisanapong detraphiphat / Getty Images
Scams, too, are very real in the cryptocurrency world. Naive and savvy investors alike can lose hundreds or thousands of dollars to scams.
Bitcoins and altcoins are controversial because they take the power of issuing money away from central banks and give it to the general public. Bitcoin accounts cannot be frozen or examined by tax inspectors, and middleman banks are unnecessary for bitcoins to move. Law enforcement officials and bankers see bitcoins as similar to gold nuggets in the wild west — beyond the control of police and financial institutions.
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That bitcoin is natively digital and powered by computers running software capable of being shut down lends to the default impression that bitcoin is inherently fragile. The mental image of a computer network being unplugged creates the false sense that one day and suddenly, somehow bitcoin as a system could cease to exist when the opposite is true for the very same reason. That bitcoin both exists everywhere and nowhere, that it is controlled by no one, that anyone is capable of running the open source software from anywhere, and that hundreds of thousands of people do, relied upon by tens of millions (and growing) is what gives bitcoin permanence. With no single point of failure, bitcoin is practically impossible to stop because it is impossible to control, and it is a dynamic system that only becomes more redundant and further decentralized in time and with increasing adoption. In short, bitcoin is more permanent than risky because it is an antifragile system. An idea popularized by Nassim Taleb, antifragility describes systems or phenomena that gain strength from disorder, which is bitcoin to its core. There is no silver-bullet that kills bitcoin; there is no competitor that can magically overtake it; there is no government that can shut it down. But it does not stop there; each attack vector and shock to the system actually causes bitcoin to become stronger.ethereum вики equihash bitcoin loco bitcoin fpga ethereum блокчейна ethereum dance bitcoin ethereum бутерин ethereum сбербанк java bitcoin pizza bitcoin bitcoin шахта bitcoin продам
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An analogy is that a cryptocurrency is like a social network, except instead of being about self-expression, it’s about storing and transmitting value. It’s not hard to set up a new social network website; the code to do it is well understood at this point. Anyone can make one. However, creating the next Facebook (FB) or other billion-user network is a nearly impossible challenge, and a multi-billion-dollar reward awaits any team that somehow pulls it off. This is because a functioning social network website without users or trust or uniqueness, is worthless. The more people that use one, the more people it attracts, in a self-reinforcing virtuous network effect, and this makes it more and more valuable over time.что bitcoin
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