What is Bitcoin Anyway?

If you’re like me, you’ve been hearing the word bitcoin a lot lately. How can a topic so fascinating be so confusing to the rest of us? What is bitcoin anyway? Is it good or bad? Should I invest in it? Is it here to stay, or is bitcoin a fad? From its mysterious founder to Dark Net scandal, you won’t want to miss this one.

What is bitcoin?

Bitcoin is a digital cryptocurrency that lives virtually to be exchanged on the Internet. The same way paper bills and metal coins have value, Bitcoin has value because we believe it has value. Bitcoin is not stock in that it has no intrinsic value or relationship to a specific company like stock (Jaffe, 2018). It’s virtual money.

The concept of bitcoin was hatched by a mystery man in 2008 who goes by the pseudonym “Satoshi Nakamoto,” whose worth is estimated to be $6 billion (Bearman, 2017). Nakamoto turned the network alert key of bitcoin over to Gavin Andresen in 2010 and has since disappeared from any bitcoin involvement. Andresen has stated that he immediately worked to decentralize the workings of bitcoin in order to assure its perpetuation. Experts believe that if the identity of this founding individual or group of people were revealed, it could raise concerns regarding bitcoin’s political standing within the company and the economics as well (Bearman, 2017).

How does it work?

You can buy bitcoin by depositing money into your online account and then converting it through companies like Coinbase to purchase your own bitcoins (Popper, 2017). From there, using your private digital key and digital signature, you can buy and sell them, purchase items on the web, or save them in your account and see if the value increases or decreases based on people’s trust in the system. Your virtual wallet stores your credentials necessary to manage your bitcoin holdings.

Who’s in charge of bitcoin?

Unlike traditional American currencies, bitcoin has no trusted central authority regulating its use. Instead, bitcoin is managed using a blockchain, which is a public ledger of bitcoin transactions. This distributed database uses a network of communicating nodes to run bitcoin software. Frequent publication of bitcoin spending is published on all nodes, leaving a confirmed, consistent, and unalterable transaction record. Unspent bitcoin resides on the blockchain with a specific bitcoin address. Transactions can be traced, but the use of bitcoins is mostly anonymous. That’s right, the individuals using bitcoin are unidentifiable except to über experts like the FBI or hackers.

In addition, computer servers use a lot of power to contain and store bitcoins. Bitcoin mining is a complicated process where data from transactions are compiled onto blockchains and then used to solve a mathematical problem to thus release more bitcoins (Roberts, 2018). Experts then locate areas where miners can buy power to run computer servers for the cryptocurrency (Roberts, 2018). It is even known that some bitcoin mines are located in old mining sites where temperatures stay cooler and prevent the servers from overheating!

As bitcoin grows in value and expands to more locations, more power is needed to sustain the servers, which means that the bitcoin miners have been scoping out areas for even more power than when bitcoin first began (Roberts, 2018). One of the areas in which miners have been using since 2013 and still is a large mining location for bitcoin is the Mid-Columbia Basin near the Columbia River, where it is said that this may be “the best place to mine bitcoin in America” because of electricity availability (Roberts, 2018).

To try to cope with the seemingly impossible demand for more mines and more servers, miners have collaborated with one another in mining pools in an effort to combine resources and portion out profits (Roberts, 2018). However, as miners are starting to build larger mines in order to accommodate more computer power, the government is starting to try to regulate the energy being used by bitcoin miners (Roberts, 2018). This is a step back from decentralization, which is something bitcoin has prided itself on since the beginning.

How is bitcoin used?

The majority of transactions using bitcoins are to buy and sell bitcoins with others on the web, but some use this cryptocurrency for more sinister deals on the dark net. In the far corner of the web is a place called the dark net, where anonymous transactions take place for heinous crimes like child sex trafficking, drug deals, assassination deals, and child pornography (Bartlett, 2014). By downloading a Tor browser, one can enter the dark net without a traceable address (Bartlett, 2014). In the dark net online drug market, known as The Silk Road, illicit drugs can be purchased using bitcoin (Bradbury, 2017). Recently more than 400 dark net programs have been seized by the US government, largely because the government couldn’t regulate the currency exchange (Bradbury, 2017).

The Value of Bitcoin

Bitcoin’s value has skyrocketed from $12 in 2013 to $10,000 in 2017 (Popper, 2017). If you invested in bitcoin in its early days, your small investment may be worth tens of thousands of dollars. However, experts believe that bitcoin value is declining in comparison to traditional stock markets (Kharpal, 2018). The changing values of stocks and bitcoin, however, are likely due to completely different reasons (Kharpal, 2018). Unlike economic factors, such as trade, that affect stock market values, bitcoin’s value is affected by user factors like FOMO and FOR (we just made that one up – fear of regulation) (Kharpal, 2018). The future of bitcoin remains controversial. Some experts believe that bitcoin is currently in a speculative bubble and will ultimately die out as a fad; others believe it will stabilize to a new form of currency (Kharpal, 2018).

What are the risks?

About 20% of all purchased bitcoins are lost(Reply All, 2018). On a Reply All podcast, a woman explained that she purchased bitcoins several years ago but couldn’t recover them because the computer she had at the time was broken and she lost her digital key (Reply All, 2018). With the help of a bitcoin hunter, the woman on the podcast recovered her balance, which turned out to be worth less than she hoped. The way to locate bitcoins can be confusing, but essentially bitcoin hunters use software programs to track bitcoins moving from one account to another (Reply All, 2018).
Bitcoin is frequently used for unscrupulous dark net transactions.
Bitcoin can be stolen if a server is breached or somebody gets ahold of your credentials.
Bitcoin’s sustainability is reliant on public confidence (Ely, 2017).

What are the benefits?

Because the cryptocurrency is decentralized and the government has no involvement, bitcoin has a lower inflation risk compared to other forms of money or the stock market (Chokun, 2018).
Bitcoin transactions are anonymous, simple, convenient, and cheap (Chokun, 2018).
Because new blocks are mined all the time, it is very difficult to make modifications to the blockchain, making it highly resistant to attack.

Will bitcoin last? Credible sources indicate both yes and no. At the moment, bitcoin is plummeting, and some experts say that within a decade bitcoin will value at more like $100 (Meyer, 2018). On the other hand, some investors believe that it is not so far-fetched to think that one-day bitcoin could be worth trillions (Hackett, 2017). I guess the only way to know for sure is to wait and see.

Thank you to CSUCI intern Allie Mattina for her awesome work on this complex article! For more information on one unfortunate way that bitcoin is being used, check out the GKIS article, Yes, Your Kids Can Buy Drugs Online. By being aware of the inappropriate ways that teens can use the web, we can start avoiding the problem behaviors before they start.