I don’t know if you’ve noticed lately but bitcoin is all the rage on social media these days. And with the value of bitcoin rapidly approaching $3k+ per coin, it’s no wonder. I remember just a few years ago when I first heard about bitcoin. The value was hovering around $100 and there was tons of excitement even back then. I remember thinking…
What the heck is a Bitcoin?
Bitcoin is a form of digital currency AKA cryptocurrency as some call it. It was created largely by Satoshi Nakamoto. The bitcoin was the answer to the double spender problem. Don’t worry, I’ll explain that in a second.
Unlike physical money, bitcoin isn’t controlled by a Central Bank. This also means it’s unregulated by any government. I bet you’re thinking “if it’s digital and unregulated, how do you keep people from creating unlimited bitcoins?” Let’s bring back…
The Double Spender Problem
Let’s pretend you and I are sitting across a table from each other eating lunch. My lunch is pitiful (because I don’t cook) but yours is a full course meal with sandwiches, fruits and veggies. You even made another sandwich just in case I didn’t bring much to eat, which is the case. You hand me a sandwich, I know this because it’s in my hands, I can physically touch it. You know you gave me the sandwich because you now have one instead of two. There’s nothing to dispute.
Money transactions work similarly except when the transactors are not in the same physical location. If you wanted to give money to someone halfway across the country, how would you do it? You could use Western Union, Paypal, or one of the many apps for your phone to transfer money.
When money changes hands across a distance, a middleman or third party is used to do the physical verification part of the transaction. This third party can be a bank, credit union, or any other type of financial institution. The problem with third party is they charge you for helping to facilitate the exchange. I can’t just wire you money free and clear.
That’s why bitcoin is great. With bitcoin, I can send money direct to you without having to go through a third party. When it comes to banks, they have a ledger that keeps track of all transactions that go through the bank. Bitcoin uses a ledger too – only this ledger is digital and public.
The Ledger AKA The Blockchain
The Blockchain is a continuous record of all transactions involving bitcoin. It’s public so anyone can view what transactions take place and between who. That makes it impossible for someone to create fraudulent bitcoins, or use the same bitcoin in two separate transactions. Were that to occur, the transaction would be caught and voided immediately. But who does the verifying?
Enter miners. Miners are people who use their computers to do a mathematical check of the blockchain, verifying each transaction in a block as valid. You might think “why would anyone do that?” For one, every time someone successfully verifies a block, a reward is given in bitcoin. This reward has a half life 210,000 blocks. The rewards started at 25 BTC but has already dropped to 12.5 BTC. It will continue to drop until the reward is virtually zero.
So Why Doesn’t Everyone Mine For Bitcoins?
For starters, it is incredibly difficult to mine for bitcoins, it’s something that can’t be done manually. Many setup dedicated computers to run the software that does these mathematical checks. You also can’t do it with the computing power of one computer. Many people found that they could mine for months and not find a single block. So people started getting together in pools to increase their chances of finding blocks and share the rewards.
Let’s Recap The Good
- Deregulated – Not controlled bay banks, so no fees.
- Can’t be manipulated to create more.
- Mining gives you the opportunity to earn bitcoins.
What About The Bad?
Let’s talk about some bad aspects to bitcoin. For starters a big one for me is there’s no recourse. Say I sell you a shirt and agree to mail it to you in a week. A week goes by and no shirt. I apologize and promise you you’ll have your shirt in another week. 2 weeks later, still no shirt and you contact me for a refund. I say sorry but I’m not giving you a refund, plus provide no proof that a shirt was shipped or even existed in the first place.
If you paid me with PayPal, you could dispute the transaction and get your money back. Even if you used your bank card, you could get your bank to reverse the charge. That’s the security of using a middleman, I guess. If you paid in bitcoin though, you’re shit out of luck. With bitcoin, once it’s sent, that’s it. You can’t get it back, unless the other party (me) decides to send it back.
The Government Could Still Pose A Problem…
Say 5 years from now, bitcoin has really taken hold. Now you use bitcoin mostly everywhere. However, the government decides they don’t like its citizens paying for things in a currency that they can’t tax, so they ban it nationwide.Obviously, this is speculation, but the government is known to do things that benefit those in charge, so it’s not too far fetched.
Worse still, what if the recent surge in bitcoin value is creating a bubble? The thing about bubbles is that many people don’t believe they can happen until they do. It happened with the internet, stocks, and most recently in real estate.
I would say you are naive if you think the same can’t happen with bitcoin.
So Should You Invest?
Well yes and no. I believe that buying bitcoin at this point is risky, but I don’t believe you should stay out of the market entirely. There are only 2 reasons to own bitcoin:
Yes, AKA to spend. Keep in mind, though bitcoin has come a long way, it still isn’t mainstream. You won’t be paying for your Big Mac in bitcoin anytime soon. Most of the population is dependent on government currencies. Also, bitcoin isn’t the only cryptocurrency. There are others; Litecoin, Namecoin, PPcoin, and Ethereum to name a few. Just because bitcoin is the popular currency now doesn’t mean it will always be. Don’t forget Betamax, HD DVD, Cassette tapes, and Blockbuster were all pretty popular too, but where are they now?
I call this “gambling” in a sense. The idea is to buy and hold in hopes that the currency continues to appreciate in value. This is the most risky reason to invest in bitcoin. What if you dump a bunch of money into it, and the value drops through the floor? Or what if one of the competitors takes over the marketplace rendering your bitcoin useless? It’s a rich man’s game, so if speculation is your plan, you better have disposable income to invest with.
To Recap The Bad
- Government could interfere.
- No protection from scammers.
- Possibly Bubble.
- Potential dangers – (lost passwords, crashed hdds, hackers)
Invest in equipment for mining and join a pool. You can find more info about that here. Set it all up and let the computers do their thing. Stay far away from these MLM companies popping up in the cryptocurrency market. If your goal is to invest in bitcoin, then there’s no point in going through a company that’s going to charge you to help you earn bitcoins. Some have already started getting in trouble for their “business” practices and that’s never a good sign. Besides, you already know that prelaunches and startups are all bad for newbies. All in all, it’s a volatile market so invest at your own risk.
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