Bitcoin – a quick explanation of bitcoin and cryptocurrencies

In May of 2010, Laszlo Hanyecz made history when he bought two large pizzas from Papa John's for 10,000 bitcoins, valued at $30. Today, that same 10,000 bitcoins would equal more than $560 million.

Cryptocurrency, aka Bitcoin, is taking the world by storm.  Cryptocurrency goes by many names, including online exchange, digital cash, digital dollars, modern money, net-based transactions, and internet cash.

But no matter what you call it, there is hardly a day that goes by you don't hear about it and get opinions from both sides of the fence on the future of cryptocurrency.

Bitcoin, the world's most popular cryptocurrency, was valued at nearly $65,000 in April, then lost almost half its value in May!

But exactly what is a cryptocurrency (Bitcoin), where did it come from, and why the heck are so many people talking about it?  Understand that Bitcoin is just one of many cryptocurrency options. As of today, Bitcoin is the most popular and gets the most coverage … and rightfully so.

What exactly is a cryptocurrency?

Cryptocurrency is a virtual currency that exists solely in a digital form. You can use cryptocurrency to pay for products and services without going through an intermediary like a bank. And it can also be held as an investment.

This "virtual money" is represented as tokens. These tokens represent a specific amount of cryptocurrency you own based on the current market value. You can sell the tokens or cash them out at current market value.

Cryptocurrency is different than centralized currency, which the government controls. Instead, cryptocurrency is decentralized, and its value is controlled by the entire network and based on supply and demand.

The current top 10 cryptocurrencies by market value

  1. Bitcoin: Value: $641 billion (the original cryptocurrency)
  2. Ethereum: Value: $307 billion (a favorite of program developers)
  3. Tether: $62 billion: Tether is a stable coin and backed by dollars and Euros.
  4. Binance: $56 billion: (the largest crypto exchange in the world)
  5. Cardano: $51 billion: (decreases energy usage and environmental impact)
  6. Dogecoin: $44 billion: (Elon Musk has been involved, and there are an unlimited number)
  7. XRP: $40 billion: $40 billion: (created by the founders of RIPPLe, a payment processing company)
  8. USD Coin: $23 billion: (Is a stablecoin and backed by US dollars)
  9. Polkadot: $21 billion: (created a cryptocurrency network)
  10. Uniswap: $21 billion

How and why did cryptocurrency get started?

Even though BitCoin was the first established cryptocurrency, there have been many previous attempts to create online currencies with ledgers secured by encryption. Examples of these are B-Money and BitGold, which you probably have never heard of because they were never fully developed and accepted.

Welcome the mysterious Mr. Nakamoto

A paper called "Bitcoin – A Peer Electronic Cash System" was added to a discussion group discussing cryptocurrency.  It was posted by someone calling themselves Satoshi Nakamoto, whose real identity is still unknown today.

Even though his true identity still is not 100% verified, three names are associated with its beginning:

  • Dorian Nakamoto: Graduated from Cal Polytechnic and is a Japanese American
  • Craig Wright: An Australian scientist with a Master's in statistics.
  • Nick Szabo: A computer engineer and legal scholar

In 2009 BitCoin software was made available to the public and was "mined," a process where Bitcoins are created and transactions verified and recorded on the Blockchain, and Bitcoin came into existence.

How cryptocurrency works - Blockchain

Almost all cryptocurrencies run on a technology called Blockchain. In the simplest terms, Blockchain is a database. It differs from a typical database in the way it stores information. Blockchains store the data in blocks that are chained together.

As new data is added, it is entered as a new block of data.  Once the block is filled with data, it is chained to the previous block, making the data chained together in chronological order. In Bitcoins case, Blockchain is used as a decentralized way that no single person or group controls the data.  Instead, all users collectively retain control.

Additionally, all blockchains are immutable, which means the data entered is irreversible. So for cryptocurrencies like Bitcoin, transactions are permanently recorded and viewable by anyone.

What is it worth, and what gives it its value?

First, let’s look at the dollar.  Our money system is called a "fiat" system, which means that money is controlled by a central bank owned by the government.  Generally speaking, governments have created money systems that allow them to manipulate the supply of their country's money supply, assuring its value is backed by the government, and promising it will always be worth something.

One of the big problems is that the fiat system is backed by "gold," and since it has been taken off the gold standard, the dollar is slowly losing its value.

Bitcoin and other cryptocurrencies are valuable because they are not plagued by the core flaws of the fiat monetary system.  Bitcoin and other cryptocurrencies are fixed by code that all participants of the network agree upon. The distribution rate of new bitcoin into the world is fixed, transparent, and cannot be manipulated by governments … at least technically. Bitcoin doesn't have a public face that can strongly influence the direction of the currency.

It is the correction of the flaws of our current money system that brings value to cryptocurrency

Who owns Bitcoin?

It is estimated that long-term investors own over 89% of Bitcoin.  Bitcoins' price has skyrocketed recently because of the tight supply and the increase in demand. Not surprisingly, the founder of Bitcoin, known as Satoshi Nakamoto, holds the largest amount, with an estimated worth close to $40 billion.

How do you buy cryptocurrency?

If you are new to cryptocurrency, it can be a bit intimidating to buy.  Thankfully, it's pretty simple to learn the ropes if you follow these 5 Steps.

  1. Choose a Broker or Crypto Exchange

To buy Bitcoin or any cryptocurrency, you first need to find and pick a broker or a crypto exchange.  A Cryptocurrency exchange is simply a platform where buyers and sellers connect to trade, and they often have low fees. Three of the most well-known exchanges are Gemini, Binance US, and Coinbase.

Crypto brokers are often a very good choice for new investors. They take the complexity out of the process and have easy-to-use interfaces to act with the crypto exchange for you. Just keep in mind that some brokerage may have regulations and restrictions on how you can move your currency, so you must do your due diligence before you purchase.

SoFi and Robinhood are two of the most well-known brokers.

  1. Create an account

Once you have chosen a broker or exchange, you will need to open an account and will be required to verify and prove your identity. This is a critical step, so you follow federal requirements and prevent fraud.

  1. Deposit cash to invest

Before you can buy cryptocurrency, you will have to put the necessary funds in your account. You can do this straight from your bank using a wire transfer.  You may even be able to make the payment using a credit or debit card.

  1. Place a cryptocurrency order

Placing an order is a pretty self-explanatory step. You will need to place your order once your funds have been verified. There are many currencies to choose from, and we listed the top ten in this article. Depending on the amount you plan on investing, you can buy a sliver of the top currencies like Bitcoin and Ethereum or buy full shares of lower-valued cryptocurrencies.

  1. Select a way to store it

Because cryptocurrencies are not backed by  Federal Deposit Insurance Corp (FDIC), they are at a high risk of being hacked or stolen. And you could lose your investment if you lose or forget your codes to access the account. Millions of dollars of Bitcoin have already been lost.

Options to store your cryptocurrency:

  • Hot Wallets: These are crypto wallets stored online and run on internet-connected devices, like phones, tablets, or computers. Very convenient but susceptible to hacking.
  • Leave on the crypto exchange: When you buy cryptocurrency, it's typically stored in a crypto wallet attached to the exchange. So you may have to pay a small fee if you want to move it to another brokerage or hot wallet.
  • Cold Wallets: Cold crypto wallets aren't connected to the internet, making them very secure. They take the form of external devices, like a USB drive or a hard drive. You have to be careful with cold wallets, though—if you lose the keycode associated with them or the device breaks or fails, you may never be able to get your cryptocurrency back.

What is the future of Bitcoin and cryptocurrency?

Crazy swings in the value of cryptocurrencies, especially Bitcoin, have again raised questions about the role and legitimacy of Bitcoin and others.  Is digital currency the future of money?  Is it a form of digital gold, or is it truly speculative and an asset that is prone to massive price swings.  The truth is, no ones truly knows. There are very reputable people on both sides of the argument.