How Does Bitcoin Work?

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Okay, I have a really basic question: what is Bitcoin, and how does it actually work?

I understand that Bitcoin is supposed to be a currency, and that a lot of people are investing in it and making (and losing) lots of money. But I don’t really understand what it is that they’re actually buying, or how something can work as a currency when its value is going up and down so much. Can you explain this to me? What’s going on with Bitcoin?

Your grasp of Bitcoin may be better than you realize – you’ve got major parts of it more or less right. But let’s back up for a moment and talk about Bitcoin’s beginnings.

Bitcoin is a digital currency. It’s not the first such currency – people have been trying to make internet money for a long time now. But before Bitcoin, digital currencies had trouble preventing people from making counterfeit copies of the digital cash. Bitcoin uses cryptography what’s called a “blockchain”: an online ledger that forms connected “blocks” of information and, thanks to its clever design, is extremely difficult to edit an change. This secure ledger tracks who owns what “Bitcoin,” based on that address. It’s also the way that new bitcoins are “mined”: people help record and maintain current transactions, then solve a difficult equation (all with computers, of course), and whoever gets it done first gets to place the next “block” – and claim their Bitcoin.

There’s a finite amount of Bitcoin out there to mine. That’s a bit unique for a modern currency, as is the fact that Bitcoin is not backed by a government. In combination, these things mean that Bitcoin isn’t being controlled in the same way that big, stable currencies like the U.S. dollar are. The U.S. government can print new dollars or adjust interest rates to help control and stabilize the value of its currency. With Bitcoin, this isn’t possible.

And that – along with the actions of excited speculative investors – has made Bitcoin a very volatile thing. That’s an intriguing thing for those looking to invest. Tracking Bitcoin and other cryptocurrencies through an investment news site like Buy BlockChain, we can see their fortunes rise and fall quite quickly.

But, as you astutely point out, this makes Bitcoin hard to use for its intended purpose: currency. It’s hard to accept (or part with) a currency that could be worth much or much less tomorrow than it is today.

Some experts believe that Bitcoin will stabilize and become useful for its intended purpose. Others believe that role will fall to a different cryptocurrency. For now, it’s best to view Bitcoin as more investment than currency – and a risky investment, at that!

“The swarm is headed towards us.” – Satoshi Nakamoto

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