Cryptocurrency 101: What You Need to Know About Bitcoin

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Cryptocurrency 101: What You Need to Know About Bitcoin

If you follow financial news with any regularity, you’ve undoubtedly heard of Bitcoin at this point. In recent months the prices of Bitcoin and other cryptocurrencies have exploded, leading to an influx of coverage and a heightened interest in the space. Still, with all the excitement and/or skepticism surrounding crypto these days, there are plenty of people left scratching their heads trying to make sense of the jargon and tech talk.

For those who find themselves interested in the idea of cryptocurrencies but aren’t sure where to start in learning about them, consider this a 101 class as we look at the basics of blockchain, some additional facts you should know about Bitcoin, alternative coins that are also making a splash, and where all of these innovations could be taking us.

The basics of blockchain and Bitcoin

The world of cryptocurrencies can be overwhelming to be sure but, at surface level, their concepts are pretty simple to understand. With that in mind, here are some of the basics of both Bitcoin and blockchain: 

What is blockchain?

The idea behind blockchain is that, instead of using banks or payment services that have a centralized ledger, Bitcoin and other cryptocurrencies can use ledgers that can be accessed and viewed by multiple parties. These ledgers are then updated with the latest transactions in a block and added to the existing chain — hence “blockchain.” Once blocks are added to the chain they cannot be easily altered, which makes the ledger secure. Moreover each block can include all kinds of data, offering different applications down the road (more on that later).

What is Bitcoin?

Founded by “Satoshi Nakamoto“ around 2008, Bitcoin is a type of digital currency that utilizes blockchain technology to facilitate peer to peer transactions. Like any currency, the value of Bitcoin is informed by supply and demand and can be tracked by searching BTC. While the popularity of Bitcoin has been growing steadily since its inception, 2017 marked a banner year for the cryptocurrency as it regularly reached new highs throughout the year.

How do you buy/store/exchange Bitcoins?

In order to utilize Bitcoin, users will need to install a crypto wallet. There are several such wallets available including BitGo, Electrum, and Bitcoin Core. Each wallet will have an address (a mix of numbers and letters that’s usually 34 characters in length) you’ll utilize to send and receive funds.

As far as buying Bitcoins, you’ll need to look to a crypto exchange. One increasingly popular option that acts as a hybrid exchange and wallet is Coinbase. This mobile app can be a good starting point for beginners but has drawn ire from bigger Bitcoin enthusiasts — and issues like slow performance during a recent boom certainly haven’t helped.

Four facts to know about Bitcoin

Now that you have a basic idea of what Bitcoin is and how blockchain technology functions, here are a few other facts to know about the currency:

It’s volatile

If you’ve only been reading headlines about Bitcoin in recent weeks, it would seem as though the currency is just constantly setting new records and making those who are already invested a lot of money. While that may be true to some degree, what you don’t see are the major pullbacks and crashes that have affected the coin’s price as well. It’s this volatility that makes crypto investing not for the faint of heart. Like with all forms of investing, you shouldn’t place any money you aren’t prepared to lose into Bitcoin or other currencies.

There are now multiple forms of it

As Bitcoin has grown, some in the crypto community have taken issue with the currency and its blockchain. Because of this, there have been some major forks in the currency, resulting in new currencies being made. Most notable among these forks is Bitcoin Cash, which happened in August 2017. A couple of months later, Bitcoin Gold was birthed, followed by Bitcoin Diamond. Meanwhile plans for another fork known as SegWit2X were suspended.

Right now these forked currencies are priced much lower than Bitcoin proper, although Bitcoin Cash is currently the third highest market cap of any cryptocurrency behind only Bitcoin and Ethereum.

Only 21 million Bitcoins will be minted

One thing that those only passingly familiar with Bitcoin may not realize is that there are actually a finite number of Bitcoins. In fact, there will never be more than 21 million Bitcoins in the world. The fact there are currently over 16 million available might seem to imply that we’re close to reaching that number. However, with each passing year, only half as many coins are released as the year before. That means the final batch of Bitcoins won’t be minted until at least the year 2140.

Mainstream merchants are now accepting it

Up until relatively recently, cryptocurrencies had mostly been associated with dark web exchanges like the infamous Silk Road. But, as Bitcoin has come to prominence, a number of mainstream retailers and service providers have begun accepting them. This list includes Expedia, Overstock, and even some Subway locations. Of course, with the current “gold rush” status of crypto, perhaps it’s unrealistic to expect many consumers to spend their coins on sandwiches at the moment.

Other popular currencies

Since Bitcoin’s groundbreaking debut, a number of other currencies have sprung up as alternatives. In many cases the founders of these coins have different views on what cryptocurrency should be or how the Bitcoin model can be improved upon. Since the list of current coins is far too long to include in full, let’s take a look at three rising cryptocurrencies.

Ethereum

If you’ve heard of any other cryptocurrency outside of Bitcoin, it’s likely Ethereum. After all, Ether — the commonly-used name for Ethereum’s currency — is the second most valuable coin currently available at the moment and has also seen astronomical growth in the past year. Unlike Bitcoin’s mysterious figurehead(s?), Ethereum was co-founded by Vitalik Buterin. This is notable because Buterin has been known to give talks about crypto and interact with user/developers on Twitter.

Litecoin

Another currency that’s been in the news lately is Litecoin. Created by former Google employee Charlie Lee, Litecoin was launched in 2011. As you’d expect, there are a few difference between Bitcoin and Litcoin, with the first being that Litecoin transactions take 2.5 minutes compared to 10 for Bitcoin. Additionally, while Bitcoin will only have 21 million coins ever made, Litecoin’s limit is to be 84 million.

Zcash

A big reason that some users turn to cryptocurrencies is for security. Zcash doubles down on that feature, writing on their site, “Bitcoin is like http for money, Zcash is https.” Notably, Zcash is also the youngest coin on this list, launching in October of 2016.

What’s ahead for cryptocurrencies and blockchain

While it would be a fool’s errand to try and guess where the price of Bitcoin and other cryptocurrencies might be headed, there are a few trends outside of those all-important numbers worth discussing:

New applications for both blockchain and crypto

Thanks to the rise of cryptocurrencies, many currently associate blockchain technology with finance. However its applications and possibilities extend far further than that. For example, as Business Insider writes, some areas ripe for blockchain disruption include healthcare, legal contracts, and even voting. As a result, expect to see startups and other companies looking for ways to apply blockchain to their industries.

Likewise, there are proving to be more uses for cryptocurrencies beyond standard transactions. One interesting use of crypto currently in the works comes from the live-streaming platform YouNow. That company is working on a number of interactive video apps — starting with Rize — that will utilize a new Etherum-minted cryptocurrency called Props. Among Props investors so far include well known YouTubers Casey Neistat and Phillip DeFranco, along with Comcast Ventures and others. Needless to say, efforts like these highlight the growth potential for crypto beyond Bitcoin.

Venture capital investments growing

Where there are startups pursuing new technologies (or new applications for existing ones), there are venture capital firms to fund them. That’s why we’re already seeing VCs up their investments in the crypto space. Take for example Mark Cuban, who recently backed a fund called 1confirmation, which will in turn back crypto-centric ventures. Elsewhere IVP — who previously invested $100 million in Coinbase while valuing them at $1.6 billion — announced a $1.5 billion fund in September aimed at investing in crypto companies. And, on the other side of the equation, BitGo recently raised $42.5 million in just two short weeks.

Between the rising prices of cryptocurrencies and the opportunities that exist to make them more accessible to the masses, it’s only logical to assume that the VC investment boom for crypto is just getting started.

Bitcoin futures and crypto’s market prospects

Just this week (December 2017), the Chicago Board Options Exchange made the controversial move of offering Bitcoin futures. Despite hesitation from some mainstream brokerage firms, the futures seemed to prove popular among traders, closing up 20% after its first day. Meanwhile the CME Group is also planning to offer Bitcoin futures soon as is Nasdaq.

Make no mistake that this could be a game changer for the crypto space. In fact it could be the biggest step toward mainstream acceptance yet. Could we one day see cryptocurrencies included in traditional investment products like mutual funds? We just might.

Conclusion

Depending on with whom you talk to, the current cryptocurrency explosion is either the future or a farce. Even if there does turn out to be a Bitcoin bubble in the coming weeks, months, or years, its success so far is a testament to the potential of crypto. Furthermore, while there are legitimate concerns about the viability of Bitcoin and others, if nothing else these currencies should be viewed as a proof of concept for blockchain technology itself. In other words, don’t expect blockchain or cryptocurrencies to go down so easily. Instead, prepare for more disruption as a greater peer to peer movement is heating up.


Also published on Medium.

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Author

Jonathan Dyer

I'm a small town guy living in Los Angeles looking to make solid financial decisions. I write for a number of finance websites, including HuffingtonPost and Business2Community. I founded DyerNews.com in 2015 to focus on personal finance and the emerging FinTech markets.

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