Bitcoin is the most popular form of cryptocurrency (with the symbol ₿). It is a digital currency (rather than say the currency of dollars, pounds or Euros for example). Some other forms of cryptocurrency are Litecoin or Ethereum. So the first thing you should realise is it is virtual if you didn’t already know, and you will not have anything physical to hold onto or put cash into a physical wallet or handbag like we do now. It was created so we could have a better way of sending money across the internet or at least as an alternative to traditional banking online cash transfers. To me this makes sense and has a natural progression, as very few of us have cash in our wallets anymore as we do it all electronically now.
So it was created in 2008 by an unknown person using the alias Satoshi Nakamoto when the domain name .org was bought and Satoshi wrote and uploaded a white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System. His real identity is still not known.
So how does it work?
So rather than using a traditional bank, it uses peer to peer software much like we use Spotify for our music. To use cryptocurrencies, you need a cryptocurrency ‘wallet’ which is the software you install on your computer or smartphone. The wallets are the tool through which confirm your identity and link to your own cryptocurrency. I should also say your computer can also serve as a ‘node’ as well as a wallet but do different things. The wallet is more your own personal account and the node is your own mini bank branch connected to rest of the branches in the world so you can see all the transactions that are recorded on a public ledger. Making sense so far?
About every ten minutes or so, all cryptocurrency transactions are collected together by ‘miners’ (similar to bank tellers), and the group of transactions are called a ‘block’ (similar to a till), and are then added permanently to the ‘blockchain’ (the bank’s safe). The blockchain is the final stop as the definitive account book of bitcoin.
So what is ‘mining’?
I have brought up the term ‘mining’ and you will see ads for people making money being a ‘miner’. What this means is that Bitcoin will pay people to collect and group these bitcoin transactions on their behalf. How they do this is by paying them a reward in newly created bitcoins for their service. For some it is quite lucrative earning more than $100,000 a year but for most it is a hobby type income much less than this. How you get set up is that there is mining software for you to download to your computer to help you do these cryptographic calculations. As basically when you collect this group of transactions, before it can get added onto the blockchain, you must do these cryptographic calculations to verify it’s legit. In the beginning it wasn’t that hard to do this calculation but now takes a lot of power and high end equipment to perform these algorithms (see final comment at bottom to how much power is needed).
How much Bitcoin is out there?
There is an upper ceiling of 21 million coins built into the software, and supposedly there will never be anymore. Based on present calculations this should be enough for circulation up to 2140. How they do this is that they have built into the system that every four years the software makes it twice as hard to mine bitcoin by reducing the size of the rewards.
What are the problems with bitcoin?
My main concern has always been there is no government or central control (yet), and so until that happens, too many cowboys, criminal elements, and even basic issues such as for example you make a mistake and pay to the wrong person or you can’t get your money out as the company has disappeared, there is no re-course as you would have with a traditional bank, and consumer protection.
Another concern is the value of Bitcoin fluctuates wildly. So while in the beginning there were a lot of people making money, it has been dropping for a period of time now, and so if you are considering investing, please see look at this as any very risky investment, and put only the amount you can afford to lose, into it. A diverse portfolio helps smooth out this wild fluctuations and so if you do well, that’s great but at least you have a safety net in case for whatever reason the company you invested all your money into, drops or disappears altogether.
Lastly a concern that has gone under the radar, in that it uses a lot of energy (electricity). Bitcoin which is only one cryptocurrency (although the biggest), uses an estimated 150 terawatt hours of electricity annually. To put that in perspective, Australia used 188 terawatt hours in 2021. Producing that energy emits some 65 megatons of carbon dioxide into the atmosphere annually — comparable to the emissions of Greece — making crypto a significant contributor to global air pollution and climate change.
So in summing up, I believe Cryptocurrency is here to stay and will become part of our way of life, and eventually there will be more control and ‘checks and balances’. But until then, the big players will be the ones who hold all the power and consumers will have little re-course, so beware and do your research.
Article by Marc Bineham – Money coach, speaker and award-winning author of The Money Sandwich