Let’s talk about Bitcoin. It’s the most popular digital currency on the planet. Bitcoin’s made some people real rich, real fast. And some major companies are buying in. But plenty of big names won’t go near it. So can Bitcoin be trusted? How does it work? And what’s Bitcoin really worth? There are thousands of cryptocurrencies out there but the one most people are talking about is Bitcoin. It’s a digital currency but instead of dollars and cents it's Bitcoins and satoshis and one Bitcoin is worth 100 million satoshis. But unlike the dollar, euro or yen this currency isn’t controlled by a government. That’s what makes Bitcoin revolutionary. And to some people — a bit scary. It used to be simple. Countries would peg their currencies to the gold stashed in their central bank.
But currencies are now just paper, metal or a number in your bank account and its value is guaranteed by a government. It’s why we trust it. We also trust the banking system to move our money — especially online. So when person A sends $100 to person B the banks make sure that amount is subtracted from one account and added to the other. And banks update their ledgers to make sure people aren’t spending money they no longer have. And, of course, banks charge fees for all that work to verify transactions.
So what if there was a way to cut out the banks? Well, that was the original thinking behind Bitcoin. The idea was posted online in 2008, describing a peer-to-peer version of electronic cash that you can send from one party to another without going through a financial institution. Its creator, or creators, used the name Satoshi Nakamoto. It was a wake-up call exposing risky banking practices. Many people lost everything, including their faith in the financial system. Coincidence or not, Bitcoin turned up at the same time and 10 years later it’s still going. So, Bitcoin is not controlled by a government. It’s not a bank or a company. Instead it’s open-source software that runs itself — or more accurately, is run by lots of people.
Here’s how. So first up it’s called a cryptocurrency because Bitcoin uses encryption to keep it secure. And instead of bank accounts people trading Bitcoin have two keys. One’s private and one is public. They’re not actual keys but bits of encrypted code that fit together. If person A needs to get Bitcoin to person B they send it to B’s public key. Think of it like the number on an ATM card. Person A uses their private key to encrypt the transaction and person B uses their private key to decrypt it and get their Bitcoin. Those private keys are like the PIN to the ATM card. Now instead of a bank verifying that transaction it’s done by a huge network of computers around the world. And they all have identical copies of Bitcoin’s ledger.
It’s a record of every transaction ever made that’s constantly being updated. So if there’s any kind of fraud the whole network knows about it. That decentralised ledger is called blockchain. Bitcoin transactions are bundled into blocks and linked together. And each block contains a bit of code from the previous one, creating a chronology that’s supposed to be impossible to mess with. So who are these witnesses? Well, they’re actual people called miners with powerful computers. Miners used to do it all on their own. Some still do. But Bitcoin’s grown. And now it takes so much more computing power and much more energy. So miners often band together in what are called pools.
Some of them build huge warehouses of servers called farms. The big ones are in China, Russia but also places like Iceland where it’s just easier to cool those servers. There’s also a lot of energy involved. A Cambridge University study says the entire global Bitcoin network uses more electricity than Argentina. But what’s in it for all those miners? Well, remember Bitcoin isn’t a company so miners don’t get a salary for adding to the blockchain. Instead the system rewards them in Bitcoin. So, transactions are actually floating around on the Bitcoin network — like in a waiting room ready to be verified. Miners look for new transactions to bundle them in blocks. But before they can add a block to the chain there’s an extra security check that’s pretty unconventional. Mining computers have to compete to solve a coding puzzle. If a miner solves that puzzle first the block and all the transactions inside it are added to the blockchain and that miner is rewarded with some Bitcoin. Another appeal among crypto fans is this idea that Bitcoin is seen as a hedge against inflation.
Other currencies suffer when, for example, more money is printed, diluting the pool and weakening its value. Bitcoin gets around the inflation problem by capping its supply at 21 million Bitcoins. At the moment roughly 17 million Bitcoins are already in circulation but there are a few million missing because some people have lost their private keys. So how does all the remaining Bitcoin keep its value? Well, the system slows that supply down. One way is by cutting the mining rewards in half every four years. In 2009 the reward was 50 Bitcoins for every block of transactions added to the blockchain. Four years later it was 25 and so on. In other words it’s basic supply and demand. Bitcoin’s supply is capped while demand grows.
For now at least. So more people are coming around to the idea that Bitcoin could rival gold — eventually. But so far Bitcoin’s value against other currencies has been far from stable. It’s gone up and down like crazy. One of the big runs was when PayPal said it would allow users to buy, hold and sell Bitcoin. Others followed suit, including Tesla, owned by Elon Musk, which said it would start accepting Bitcoin as payment too. But is it? Not everyone gets it or believes in it. Yes, companies like Microsoft, PayPal and Mastercard accept Bitcoin. You can use Bitcoin to buy gift cards at Nike or Starbucks. But its use is limited. And while crypto enthusiasts think Bitcoin’s value is going to climb even higher — maybe even to the point where one Bitcoin is worth a few hundred thousand dollars — others say it’s just a bubble. There are other concerns with Bitcoin too. If something goes wrong — you forget or lose your private key for example — there’s no customer service to call. Another issue is Bitcoin being misused. Criminals like it because it’s anonymous. So regulators are already looking into it.
In the grand scheme of things Bitcoin is still a pretty new concept. Some people are willing to take a big financial risk to chase a potential fortune. Others think there’s no way a piece of code is worth tens of thousands of dollars. It boils down to trust. Like any currency — for Bitcoin to work, enough people have to buy into it. There’s obviously a lot more to Bitcoin and cryptocurrencies, plenty of stuff that we didn’t have time to get into. Let us know if you’d like another episode on it.
I’ll see you next week.