Let’s be honest here: I'm confused, your confused, he's confused, and she's confused; hell, everybody’s confused. Step out from under a rock for longer than an hour, and at some point, you’re bound to hear the words Bitcoin or cryptocurrency. Even if you try to avoid them, they seem to pop up when you least expect it -- kinda like car problems.
There’s a clear distinction that should be made. Take all those fancy words out the equation and cryptocurrency is digital money. The prefix crypto makes it sound complicated, but the idea of it is fairly simple. Bitcoin, the name you’re probably used to hearing, is a type of cryptocurrency, but it’s not the only type; It just so happens to be the first and most important. I’ll try to explain cryptocurrency as a whole and then focus in on Bitcoin and how it works.
I won’t be advising on how to invest in cryptocurrency, but hopefully after reading this post, you’ll at least know how cryptocurrency works and how to get started.
Why does cryptocurrency even matter?
Cryptocurrency is relatively new, but the idea of digital cash isn’t. Folks had been attempting to create digital cash that was worth a damn since the ’90s, but they were about as successful as Joe Swanson from Family Guy would be in a kickball game. When Bitcoin was initially released in ‘09, the one (and most important) thing that separated it from previous digital cash attempts was that it was decentralized. That point is very, very important because that’s what makes cryptocurrency, cryptocurrency. Countries have central banks in place (the U.S. has the Federal Reserve, for example) that are in charge of enforcing policies, controlling the money supply, determining interest rates, etc., but cryptocurrency is 100% peer-to-peer, compadre-to-compadre, business-to-business. No institutions or middlemen involved.
Cryptocurrency takes the borders away from earth. It can be sent anywhere (and used where accepted) without having to go through third-party companies like PayPal, Western Union, or Visa that charge fees for transactions. More importantly, it takes big banks and traditional financial institutions out the equation. If you’re not familiar with the ‘08 financial crisis, let me sum it up in a couple of sentences: A bunch of old white men in fancy suits at these banks and institutions gambled with customer’s money and lost...big. This forced the government to spend $700 billion of taxpayers money to bail them out. Since then the trust towards financial institutions has been running thinner than oxygen at high altitudes. Learning how cryptocurrency works will help you understand how that problem is solved.
How does Bitcoin work?
Explaining how Bitcoin works can get a lil’ confusing without using real-life analogies that help paint the picture, so I’ll try to do just that. Bitcoin operates on what is called blockchain technology. This blockchain technology collects and stores any and every Bitcoin transaction that has ever been made. Every 10 minutes any transaction that has been made in that time slot is collected into a “block” and then added to previous blocks, creating a long chain of blocks. I bet you would've never guessed that looking at the name. Every transaction that has ever been made is permanently recorded on the public blockchain. To help you understand this, let’s use a popular example like a club.
People in line outside: Transactions
Miners are people who collect transactions, verifies that they’re legit and then adds them to a block for the next blockchain. As you could imagine, they charge a small fee for doing this work.
Imagine the bouncer calling a group of people in line forward every 10 minutes (you know clubs like to hold the line to make the party seem more lit than it really is). He checks their ID’s, charges a cover, and then allows them in the club. That’s how the blockchain works.
There are tons of miners around the world working independently that are keeping the network powered, which is how Bitcoin is decentralized. The network doesn’t rely on one institution or person to keep it running.
How to get started buying Bitcoins
I’ll try to keep this as straightforward as possible. It’s easy to get lost in the sauce with all the different options and the pros and cons of each, so sometimes it’s easier to just stick to what’s proven. If you’re a first-time buyer, look no further than Coinbase. Coinbase is the premier company to use when purchasing Bitcoins early on. It’s safe, reliable and user-friendly. Coinbase can also be used to buy other cryptocurrencies like Ethereum, Litecoin and Bitcoin Cash (don’t confuse this with Bitcoin, they’re different). We’ll cover those and other altcoins (non-Bitcoin cryptocurrencies) in a later post in this series.
After you create your Coinbase account, you have the option to transfer money into your Coinbase account from either your bank account or your debit/credit card. Once this happens, you can use that money to buy cryptocurrencies. The pros and cons of each are below:
-Pro: only a 1.49% fee. About $1.49 per $100
-Con: Takes 3-5 business days. If you need your coins in a hurry, avoid this option, fam
-Pro: Coins can be purchased immediately
-Con: 3.99% fee. About $3.99 per $100
It should also be noted that you can buy a portion of a Bitcoin, you don’t have to buy a whole Bitcoin. For example, if the Bitcoin price is at $10,000 and you only have $2,000, you can buy 0.2 Bitcoins (BTC). Hell, if you only have $10, you can buy 0.001 BTC. Just like 1 dollar can be broken down into quarters, dimes, nickels and pennies, 1 Bitcoin can be broken down into 100,000,000 units -- called satoshis, which is named after the anonymous founder.
Salute to whoever Satoshi is for remaining anonymous because had I created Bitcoin I’d have an ad in Times Square with me in a mink robe, no shirt on, a bottle of Hennessy, and a cigar, proclaiming my genius.
Storing your Bitcoin
Like regular cash, Bitcoins and cryptocurrency need to be stored. And just as cash can be stored in different ways, cryptocurrencies can also be stored in different ways. There are five primary wallet types:
- Web: used via cloud technology.
- Mobile: apps convenient for storing on your phone.
- Desktop: intended to be downloaded to your laptop or personal computer.
- Hardware: physical “wallets” that are essentially USB drives.
- Paper: physical paper with your public and private keys on it.
When you get a wallet you'll have a public key which you use to send and receive Bitcoins and a private key which gives you actual access to your currency (almost like an online banking PIN).
With online, mobile and desktop wallets you leave your private key in the hands of other companies and trust they’ll keep them secured; most do, but you must know it’s not 100% guaranteed. There's always risk storing your cryptocurrency there long-term. With hardware and paper wallets it’s on you to guard it like Champ Bailey in his prime.
There are other factors surrounding Bitcoins and cryptocurrency that weren’t touched on in this post, and that’s mainly because if I were to write about it all, this post would be longer than the liquor store line on New Year’s Eve. For newcomers, I feel as though it’s important to capture the basics -- buying and storing -- before focusing in on other parts of Bitcoin and cryptocurrency, such as using it for investment purposes. It’s easy to view Bitcoins and cryptocurrencies as a get-rich-quick type of thing because you often hear about “early investors” who got rich off Bitcoin. But, let’s be honest and address the elephant in the room: a lot of people started off using Bitcoins to buy drugs, organs and a whole lotta other questionable things on the dark web, so don’t feel bad if you missed that train, fam.
Bitcoin is still in its early stages, and there’s still time to get in before it goes truly mainstream, but don’t buy it with the intentions of making a lot of money fast because chances are it won’t happen like that. Especially without having a large amount of cash to put up initially. Buying $100 worth of Bitcoin won’t turn you into Warren Buffet overnight. Take the time to learn how it works and why it works, and you’ll put yourself in position to be ahead of the curve not only with Bitcoins, but also with cryptocurrencies as a whole. In the meantime, remember to drink more water, support local business and laugh a lil’ bit.