What Is Bitcoin? A Quick Starter Guide

Though normally financial news is restricted to the business pages of stuffy publications, the last few months even regular newscasters, often tripping over the unfamiliar words, have been talking about a new — well, what is it? — taking the world by storm: bitcoin. In this article we’ll see whether we can get a little closer to what bitcoin actually is and what its future may possibly be.

However, if you’re interested mostly in what it isn’t, we can save you the trouble of reading onward: bitcoin is in no way, shape or form, an actual currency. Though it can be used to buy products from a number of vendors (fewer and fewer, we would like to add), the way it is traded and sold makes it more of a commodity in and of itself.

That said, we would also like to distance ourselves from the Debbie Downers who seem to think that bitcoin is the beginning of the end; though its future as a currency is in doubt, bitcoin is a herald of several exciting new developments and technologies, which is good news for everyone, as well as a way in which a handful of people have gotten very, very rich, which is good news for, well, that same handful of people.

Cryptocurrency and Blockchain

Bitcoin is a complicated subject and picking a beginning is as hard as explaining what’s going on. In this article we’ll start by tackling the term cryptocurrency, which is the umbrella bitcoin falls under. Besides bitcoin, there are other digital coins like Ripple, Ethereum and Litecoin, to name but three of many.

In short, cryptocurrencies are completely digital coins that you should be able to exchange for goods and services purchased online. For example, several of our best VPN providers allow you to pay them with bitcoin and its ilk (though again, fewer and fewer), as did Steam until a few weeks ago.

The “crypto-” prefix is in this case short for “cryptography” rather than some derivation of the word “secret.” This is because all cryptocurrencies rely on some form of cypher for them to exist and keep them from being duplicated or stolen.

Bitcoin has as distinction that it was the first cryptocurrency to make it big (more on its history later), but all the ones currently active have the same technological underpinnings, something called the blockchain. Going into the full ins and outs of blockchain is beyond the scope of this article, so let’s keep it short and say it’s basically a digital ledger that keeps track of how many units of a cryptocurrency have been traded.

This ledger is stored in such a way that old entries can’t be wiped, nor can be manipulated by anyone else. It is a revolutionary new technology that has a lot of people besides bitcoin fans excited, including bankers, accountants, hedge fund managers and politicians (though this last group seems to mainly be interested in the “cheap” and “easy” descriptors and likely won’t be such big fans of the fact that information can’t be deleted).

The inherent security of blockchain is great not just to keep your bitcoins or what have you safe, but also for another reason: traditional currencies’ creation and management is in the hands of central authorities (usually central banks). Because blockchain is so transparent, cryptocurrencies can be regulated by the people that own them.

Or at least in theory, but more on that later. Let’s first take a look at the history of bitcoin and with it, pretty much all other digital coins.

Bitcoin Past

The idea of creating a digital-only currency is as old as science fiction, with a lot of people throwing ideas around online ever since the geocities days. In fact, bitcoin is far from the very first of its kind, it’s just the only one that was entirely internet-based and successful enough to make it past a few hundred users or so.

This is mainly because it was the first cryptocurrency to solve one very important riddle: what prevents cybercriminals from accessing your database and making off with your currency or, worse yet, stealing the code and basically creating as much as they want, turning your hard work into so many more worthless bits and bytes?

After all, most of the effort that goes into designing regular currency is to make sure that people can’t copy it too easily, while banks, stores and even individuals spend plenty of time and money to make sure nobody steals their cash (installing safes, arranging armed transport, building firewalls for online banking, etc.).

The person who figured it out in this case was named Satoshi Nakomoto and that’s pretty much all we know about him. Though there’s plenty of speculation on who the man is — he might not even be Japanese, his name notwithstanding, because, gasp, sometimes people on the internet lie! — with some of the wilder guesses including Elon Musk of Tesla (he denied), as well as a host of crypto enthusiasts and maverick economists.

Nakomoto’s big invention was a form of blockchain technology which made “double-spending” — spending a bitcoin twice by exploiting the code — impossible. His code also allowed users to “mine” bitcoin, or run a computer process that creates new bitcoin.

As more bitcoin are created, it requires increased processing power to make more, meaning that mining has become a very serious enterprise, indeed, especially since Nakomoto hardcoded a limit of 21 million bitcoin total into the code.

Any bitcoin added to the ledger was there to stay, and couldn’t be tampered with. The bitcoins themselves were pieces of code that couldn’t be copied are messed with either, meaning that Nakomoto had created a digital coin that was in some ways even safer than many of the hard currencies in use, an impressive feat.

It should maybe be noted here that once the first “block” of around one million bitcoins was mined, Nakomoto disappeared, never to be heard from again. He left it to his supporters to mine the next few million bitcoin and then things really took off. Currently Nakomoto, whoever he is, is sitting on a pile worth billions.

Bitcoin Present

Nakomoto finished mining the first block of bitcoin in January 2009. Below we have a graph that shows the increase in price of bitcoin on the open marketplace, starting in early 2009 until mid 2017 (we’ll have the figures for the truly meteoric rise that propelled bitcoin into a household term a few paragraphs down).

As you can see, the first two years pretty much nothing happened. Bitcoin was mostly seen as a hobby by many, with only a few people taking it seriously. This group were mainly privacy advocates, who saw in bitcoin a way in which to snip the last bit of identifiable information away from you.

Since in the end people need to pay for things on the internet, many purchases can easily be traced back to you by checking your payment information, usually your credit card or other banking info. Bitcoin was the first safe, anonymous payment method around and a few people could see ahead into the future, realizing it would be a great hit.

The price of bitcoin barely covered the cost of mining it (you need some pretty serious hardware for it, not to mention the cost of electricity) until late 2013, when it started seeing a small raise in price. This is despite bitcoin already having become infamous as the oil that greased the engine of the Silk Road, the illegal marketplace that flourished from 2011 until it was shut down by the FBI in 2013.

It’s always hard to say why the price of a commodity goes up or down. Though there are plenty of general laws of economic that tell us when something should happen, none of them mean it will happen. In the case of bitcoin, the price going up seems to have been a combination of fame, interest and a bright future as the currency of the internet.

Higher and Higher

That said, the vagaries of bitcoin are fairly spectacular: starting out worth less than a penny, bitcoin in late 2013 hit a high of $1,242, only to tumble once again, bounce once or twice, to settle down in the $400 to $600 range for the last five months of 2016. Then, when the clock struck midnight on January 1, 2017, the real fun began.

The above graph only shows the cryptocurrency’s price from August onward, but it’s basically the most interesting six months in any commodity’s history. Bitcoin was gained ground for the first six months of 2017 until it was at around $4,400 at the start of August; after that it starting going all over the place, first with a massive drop from five grand to just over half that in September, then the insane price increases that have had everyone talking.

Bitcoin climbed so rapidly over the course of just a few months — from that slump of just over $2,000 to highs of over $20,000 — that many commentators invoked tulipmania, a social hysteria that crept over the Dutch Republic in the seventeenth century, when people bought and sold tulip bulbs for insane prices.

Eventually that bubble, based as it was on highly perishable goods, burst and dragged the entire economy, one of the world’s strongest at the time, with it. It was one of the worst economic crisis of early modern history and has stood as a lesson in the centuries since.

However, the bitcoin bubble isn’t set to burst yet, despite several nasty tumbles it took: many, including this author, thought the party was over a few days before Christmas when bitcoin fell from $20,000 to under $15,000, but miraculously it repaired itself and heralded in the new year at an almost entirely recovered price.

Bitcoin Future

However, markets are unpredictable and we’ve already had several scares in 2018, and the year’s not even two weeks old at time of writing. Right now it’s below the $14,000 mark, though by the time you’re reading this it could be far higher or lower than that.

Though this volatility could be great news for people who bought in at the beginning — they have nothing to lose, after all — or who have a couple of million bucks to throw at the problem, there is a fear that plenty of guys dreaming of a big score might get suckered in.

Now, speculating on a commodity is something you do on your own lookout, of course, our aim is more to provide a counterweight to the sky-is-the-limit crowd that seems to have sprung up almost overnight, some of them claiming bitcoin could hit a million. While that may be, events from the last decade should teach us that the price of an investment can fall as well as plummet, so always avoid investing money you can’t afford to lose.

Besides the specter of investors getting wiped out should bitcoin crash — and some of those investors are big enough the economy as a whole could feel the bump — this massive rise in bitcoin’s value has an interesting side effect, namely that it’s attractiveness as a currency has lessened.

Bitcoin is fluctuating so badly currently that it’s almost impossible to set a price on any commodity or service without it being outdated just an hour or two later. Though this may seem attractive at first, as a seller this can also work against you if the currency in question has lost a quarter of its value in just a day’s time (there’s also the matter of high handling fees for bitcoin).

As we said earlier, Steam has stopped taking payment in bitcoin, as have several other vendors. Though it’s unclear what kind of reduction there is across the board — before the madness started thousands of stores both digital and physical accepted bitcoin — there seems to be a consensus that for now at least bitcoin’s role as money may be played out.

Bitcoin and Politics

Another important change this year is that now some countries are turning against bitcoin, often because they are worried that rampant speculation may destabilize their own economies, sometimes just because they don’t like the whole “anonymity” thing (looking at you, China).

Right now the Middle Kingdom as well as South Korea are taking action against all cryptocurrencies, including a ban on initial coin offerings (ICO, the way in which companies try and raise money by releasing their own cryptocurrency), with rumors swirling that other countries are contemplating much the same measures.

Again, reading tea leaves is a dangerous hobby, but there’s no denying we’re moving into interesting times when it comes to bitcoin and cryptocurrencies.

Conclusion

On which note we’ll end this article, as really all we can do from this point is read tea leaves, which isn’t what journalists are supposed to do. Whatever actually happens with bitcoin, cryptocurrencies are definitely here to stay, as is the blockchain technology with which they were created.

In fact, no matter what you think of cryptocurrencies, you can’t deny that blockchain is a real game changer which will alter the way in which we not only store money, but also data. You can also check out which cloud storage is best for bitcoin.

Among our best online backup providers, however, Acronis has gone so far as to implement blockchain technology, read more about one product in our Acronis True Image review. You can also directly backup bitcoin, read our linked guide for more on that.

What do you think of cryptocurrencies? Are you a bitcoin investor, or do you prefer to put your money elsewhere? Let us know in the comments below. Thank you for reading.