Ever wondered what bitcoins and other cryptocurrency are and how they work?

Ever wondered what bitcoins and other cryptocurrency are and how they work?

Written by Diane Ware - December 26, 2017 in Software

One of the main things to understand at the outset of this blog post is the definition of money, or currency. Once you understand this, it will be much easier to grasp the concept of bitcoins as money.  

The short answer to understanding currency is this: all currencies have value only because people believe they have value. Our cash that we carry around? It only has value because people believe it has value. I mean, there is the Federal Reserve System and the overall banking system of the U.S. and all the details and particularities in between, but really, money is only as valuable as the system that created it in the first place, a system created by people. So why couldn't computer algorithms or encryptions be used just the same as our usual cash or credit card money? 

Bitcoin was started in 2008 by a group of people, mostly unknown (even to this day!) though under the pseudonym of Satoshi Nakamoto, who wanted to create a better, less corrupt money system than what has been the norm for many years, especially with the financial crash occurring in 2008. There are more details to how it works, but basically it has to do with downloading a Bitcoin wallet to your computer. Once on your computer, the Bitcoin wallet will encrypt and maintain the bitcoin balance in this wallet. The Bitcoin wallet can be put on your computer, smartphone, or on a website online.  

Now...where do you get the bitcoin money to put into your Bitcoin wallet?  

Before discussing bitcoin money, it would probably be better to understand how bitcoin mining is accomplished  

Bitcoin mining is how bitcoins are produced, which are actually tokens of "real" money we use already. You know when you buy tokens at an amusement park, like say a $2 dollar token for one of the children's rides? Well you typically buy those at the front amusement park entrance, and then once at the children's rides' location, you simply present the token instead of cash or a credit card to pay for the ride. Well, that, in essence, is how bitcoins work.  

Think of bitcoins as "digital gold". 

As quoted from this article on bitcoin mining,  "Around the world, hundreds of thousands of specialized computers have been built to create (or "mine") bitcoins and, in the process, validate transactions and protect the system." This system of bitcoin mining is a means to make sure that bitcoin transactions are valid, and if these transactions should be added to a "blockchain" (as quoted from the same article above: "an ever-expanding ledger that holds the transaction history of all bitcoins in circulation"). For example, how can it be possible to make sure that one bitcoin is not used twice (sort of like using a token for a dollar bill one time, but then somehow getting that token back and using it again...and again and again – before long, you could be quite rich from such a scheme!). Bitcoin mining helps to prevent such a negative outcome. 

Here is how bitcoin mining works (from the same article above): "Every ten minutes or so mining computers collect a few hundred pending bitcoin transactions (a “block”) and turn them into a mathematical puzzle. The first miner to find the solution announces it to others on the network. The other miners then check whether the sender of the funds has the right to spend the money, and whether the solution to the puzzle is correct. If enough of them grant their approval, the block is cryptographically added to the ledger and the miners move on to the next set of transactions (hence the term “blockchain”). The miner who found the solution gets 25 bitcoins as a reward, but only after another 99 blocks have been added to the ledger. All this gives miners an incentive to participate in the system and validate transactions. Forcing miners to solve puzzles in order to add to the ledger provides protection: to double-spend a bitcoin, digital bank-robbers would need to rewrite the blockchain, and to do that they would have to control more than half of the network’s puzzle-solving capacity. Such a “51% attack” would be prohibitively expensive: bitcoin miners now have 13,000 times more combined number-crunching power than the world’s 500 biggest supercomputers."

Understanding how bitcoins are mined will help you feel either more comfortable with bitcoins, or less, I suppose, depending upon your past experience in financial endeavors and what type of online buying or other purchasing you normally do. 

But, either way, the main crux here is that once your Bitcoin wallet is set up, you can then transfer funds from your banking account to this wallet. And then, once in the wallet, you can spend how you usuall do, depending on whether the online store or a brick-built, physical store will take bitcoin. Check out this article for some well-known businesses that accept bitcoin. Microsoft, Expedia, Newegg, and Subway are on that list. 

Since bitcoins are so new, only since 2008 like I mentioned above, many issues, some quite new and odd, have arisen with bitcoin use. For one, market speculation has occured for bitcoin value. This concern is emphasized in this howstuffworks.com article, quoted here: "In 2010, a unit of 1 bitcoin was worth just a few cents. Over the next few years, Bitcoin's value rose and fell from hundreds of dollars to just a handful. But nothing quite prepared investors for 2017, during which wild Bitcoin speculation drove the price of a single bitcoin from less than $1,000 to over $16,000."

So with these issues, the bitcoin site is recommending astute, careful use of bitcoins: 

Thank you for reading this blog article :-)

In this article:
bitcoin
software
currency

Diane Ware

Manager - Tech Support

I am co-owner of Ware Repair and enjoy working with technology, web design and development, and embedded programming, especially that which applies to robotics. I also enjoy writing blogs and sci-fi novels on my free time.