Learning about cryptocurrency can feel a bit like learning another language. What does it mean when someone is “mining” bitcoin? What does the term “blockchain” have to do with all this? Even if you have no real interest in using cryptocurrencies like bitcoin for yourself, it’s still a good idea to know what it is and how it works. Before you can take a deep dive into the present and future of bitcoin, it helps to know a bit about the history of cryptocurrencies.
Banking Without Banks
Look in your wallet and take out a dollar. Why is that dollar worth a dollar? It’s not because the materials used to make the dollar are worth that much. In 2014, the Bureau of Engraving and Printing nearly 7 billion paper notes, which is just a small percentage of the total amount of money being circulated right now in the United States. $1 and $2 bills (yes, those still exist) cost about 5 cents to make, while $5 bills cost 11 cents, $20 bills cost 10.5 cents, and $100 bills 12.3 cents. Even the highest denomination of bills doesn’t cost as much as what the government says the money is worth, so what gives? Well, the government used to tie the value of a dollar to the gold standard, but in 1971, President Nixon decided that wasn’t a viable plan anymore. This was a good call, since the U.S. economy struggled, and world currency speculation got very out of hand.
Nowadays, the U.S. dollar is worth $1 because, well, we say it is. The U.S. government backs the dollar. Bitcoin, on the other hand, is very much decentralized, at least in theory. In fact, that’s a big part of the appeal for many people. If we use a debit card to buy groceries, then the bank keeps a record of that transaction. That’s not the case if you use bitcoin. There’s no central bank or government involved. Instead, it’s a digital currency that uses a network of computers to verify transactions. It may seem like a new thing, but the concept began a decade ago in 2008. Bitcoins do not exist in a physical sense. They’re not represented via paper money or a plastic card. Instead, they’re represented by long strings of letters and numbers, as well as something called blockchain.
There are several reasons to use blockchain, some of which are better than others, but even if there’s no government or bank involved, you still need some sort of record that the currency exists, right? That’s where the blockchain comes in. If this is all getting confusing, it might help to think of a blockchain as like a public bank ledger minus the bank. When you have cryptocurrency, you have a private key (like a long password) to a specific address on the blockchain. Think of it as like taking a 100-page bank ledger and turning to page 38 to find your money. It’s public and doesn’t rely on a single server to function.
The U.S. mint does not create bitcoins. Instead, bitcoin miners, who turn encrypted transactions into verified blocks on the blockchain, create them. Miners who follow the rules create a block receive a certain number of bitcoins. Not just anyone can bitcoin mine, because you need a great deal of computer power to solve very complicated math problems. The funny thing about bitcoin is that it’s used as both currency and a way to invest. People who have no idea how to mine bitcoin are still interested in buying cryptocurrency stocks. Do some research on bitcoins on your own time and decide if that sounds like a good option. Even if you’re not into it, bitcoin is still a big part of the economic conversation right now. Figuring out the basics now can help you keep track of where that conversation goes in the future.