I’m sure all of you have already heard at some point in your life that if you bought bitcoins for the price of a pizza back in 2009 at the start of it, today you would be a billionaire. But what the heck is bitcoin or cryptocurrencies in general? Let’s find out 🧐
Cryptocurrencies are currencies
The main difference between a cryptocurrency and fiat currency is that ‘Crypto Money’ is decentralized. This means that there is no central institute that is responsible for validating a transaction.
A Fiat currency is a currency that is backed up by the government that issued it and whose value is underpinned by the strength of that government. Such currencies are, for example, USD or EURO
So how is it secured? 🔑
You may have also heard terms like ‘distributed’ or block chain. Let’s see how this all works.
All transactions are stored in the so-called blockchain (block -> data, chain -> the database). You can imagine this with a huge excel table with rows containing who sent money to who (and much more, geeky stuff, let’s move on…). This blockchain, however, has to be stored on a computer right? But where is this computer?
Well… everywhere. Thousands (or in case of Bitcoin even millions) of copies are stored on thousands (or millions) of computers all over the world (distributed). These copies are synchronized at all time and this is what makes cryptocurrencies so secure. In order to hack the system, a hacker would have to modify data in all copies at once otherwise would be noticed really fast.
Who owns these computers?
Anyone! Even you could opt in to get a copy of this database (as it is public) thus becoming part of this network (A Node).
What about my transaction?
For you to own bitcoins you have to have a digital wallet. This wallet is usually offered by a company, you sign up to, in the form of an app or even some physical storage like a pen drive (of course software is involved in this case as well). This wallet not only stores your money but also two really important things: your private and public keys.
What are those… you may ask?
You can imagine that whenever you initiate a transaction, you send out a message. This message contains the recipient of the money and the amount of course. For this to be secure you have to sign the message with your private key. This is the one that only you know. The signature procedure is more like encryption.
The message also contains you public key. This is later used to verify the transaction.
Whenever you send out such a message, all nodes of the blockchain get notified about it and verification happens. In case of successful verification, your transaction is added to the blockchain and the recipient receives the bitcoins.
What about the verification?
This is the point where ‘Miners’, that you may have also heard about, come in the game. In order to verify a transaction (to, of course, avoid hacks like double-spending, where you spend the same bitcoin twice) someone has to take your public key and decrypt your signature. This process is really time and resource consuming because it is basically guessing of numbers as big as 2^256. Which are… well… big…
The so-called Miners are people who spent tons of money on computers that are able to do the verification before all the others. Why? Because these people are not just doing this out of pure kindness. They get a given amount of bitcoin for every verification they do. But they have to be the first. No one cares about the same info for the second time.
What gives value to Bitcoin?
There is nothing special about them here. It’s basic economy. The value of bitcoin (and any other cryptocurrency) comes from people’s demand for them.
But why people want bitcoin? Well, the reason behind a global demand is far beyond the scope of this article. Some people see huge potential in the encryption technologies involved in cryptocurrencies, some like the idea that the maximum number of bitcoins is finite (21,000,000) others are expecting quick and easy money from them.
Why is it fluctuating so fast?
This is again a complex topic but in general, we can say that bitcoin may fluctuate because of its nature. As we saw, bitcoin (and cryptocurrencies in general) are not backed up by a government. It purely depends on demand and design decisions made by the developers of the core technologies behind them (like the maximum number).
As we saw, Bitcoin and cryptocurrencies is a really interesting topic. Their nature is so different from fiat currencies but still, it is controlled by the same rules of the economy. I hope I managed to clear the mist around Bitcoin.