Seven questions about Bitcoin I was too embarrassed to ask



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No, they are not really bitcoins.

The price of Bitcoin reached a new record this week, exceeding $ 11,000 on Wednesday morning. The price has been a roller coaster since then, with the price falling briefly to $ 9,000 later on Wednesday before recovering much of its lost value in recent days.

The amazing earnings of the currency – value less than $ 1 at the beginning of 2011 – made many people wonder if they should pay attention to the technology. Coinbase, a popular service to negotiate dollars and bitcoins, now says that it has more than 13 million users. While almost everyone has heard of Bitcoin at this time, many people are confused with the details: what is a bitcoin, exactly? How do I buy a little? What would you use it for?

We are here to help you. Read on to get a beginner's guide on bitcoin. We will explain what Bitcoin is, how it works and what ordinary people should know about technology.

1) What is a Bitcoin?

The term Bitcoin actually refers to two different things. Capital-B Bitcoin is a payment network, like MasterCard, it is a payment network. Bitcoin in lowercase refers to the currency of the Bitcoin network, just as MasterCard uses dollars in the United States.

What makes Bitcoin different from MasterCard, PayPal and other payment networks that existed in 2008 (when Bitcoin was invented) is that Bitcoin was the world's first fully decentralized payment network. The MasterCard network is operated by MasterCard Inc., but there is no Bitcoin Inc. in charge of the Bitcoin network. Rather, it is a peer-to-peer network that maintains a shared transaction book called blockchain.

Inventing a new currency was an inevitable consequence of making the Bitcoin network completely decentralized. In a conventional payment network, the owner of the network agrees to exchange balances for conventional currencies such as dollars or euros. But there is no Bitcoin company, so there is no one to guarantee that the Bitcoin balances have a particular value. In contrast, bitcoins float against conventional currencies, with their value determined by supply and demand.

And no, those physical "bitcoins" that you see in many images are not what a bitcoin really looks like. Bitcoins are just entries in the Bitcoin blockchain. If you own some bitcoins, that means you have some cryptographic private keys stored on your computer, on an external disk or printed on a piece of paper somewhere. These pbadwords allow people to spend the bitcoin balances in the same way that the pbadword on their bank's website allows them to spend the balance in their bank account. But you can not withdraw bitcoins from the network the way you withdraw physical currency from your bank.

2) If Bitcoins are not linked to a conventional currency, how have they become so valuable?

  Note that this table has a logarithmic Y axis.
Enlarge / Note that this graph has a logarithmic Y axis.

Good question! When the Bitcoin network was first created in 2009, bitcoins were worth almost nothing. The Bitcoin tradition holds that the first Bitcoin transaction in the real world occurred in May 2010, when a Bitcoin user paid another user 10,000 bitcoins for two pizzas. At that time, the Bitcoins sold for less than a penny each.

But as the Bitcoin community grew, the value of the currency increased steadily. When I started paying attention to Bitcoin in April 2011, its value had increased to $ 1. This was at the beginning of the first big Bitcoin bubble. The media coverage of Bitcoin attracted new users, which caused the price to increase. The price increase, in turn, attracted more interest from the media. The value increased to more than $ 30 in June, before it fell and fell to $ 2 before the end of 2011.

This cycle was repeated twice more in 2013. In May 2013, the Bitcoin price rose briefly above $ 250, before falling by approximately 80 percent. Then, in late 2013, the price of Bitcoin rose above $ 1,000 before falling back to 80 percent. The current boom – which has taken the $ 200 coin in early 2015 to a very high level of $ 10,000 in recent days – is the fourth Bitcoin boom.

Each of these booms-and, for that matter, most bubbles in all history-has been driven by the same basic advertising price feedback loop. As an Internet writer, I have seen this process firsthand. In times when the price is rising, there is a lot of traffic to write about Bitcoin, so journalists like me write articles (like this one!) In this regard. The articles make more people pay attention to the currency and some of those people decide to buy. That raises the price even more, triggering more media coverage and more public interest.

This startup process has achieved something that most people, including me, would have thought was impossible a decade ago: a valuable currency that is not backed by a commodity like gold or silver, nor by a powerful institution like a government or a bank. On one level, the value of Bitcoin is increasing simply because more and more people are betting that their value will continue to rise over time. The question, of course, is whether they are right about it.

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