With the multitude of Bitcoin articles out there so complex and technical, you can’t help but agree the creator of Bitcoin is a genius mastermind of complexity.
Imagine a huge room with security cameras everywhere recording all activity that happens in the room. The footage is available forever, and anyone can view it online. The room is then filled with unbreakable glass piggy banks (with coin slots of course) so that everyone can see which coins are in which piggy bank. The piggy banks are secure so that no one can steal from them and they cannot leave the room.
Everyone has a key that will only open the piggy bank that belongs to them. Let’s say you have 2 Jay Chou concert tickets for sale and I want to buy them from you. You then tell me which piggy bank is yours so I can deposit the coins. To pay you, I walk into the room with a mask so that no one knows who I am, but yet knows the sale took place from the security cameras.
I walk to my piggy bank, unlock it, take some coins out, then walk over to your piggy bank and slot them in. Finally I leave the room. Now, everyone out there watching the security footage will know that your piggy bank has coins that were in my piggy bank. And in that way the history of every coin is established.
Now follow through with us on these steps:
1) Replace piggy bank with Bitcoin wallet.
2) Replace security footage with Bitcoin logs.
3) Replace coins with Bitcoin.
Congratulations! You now know what a Bitcoin is, albeit an oversimplification. You can find a good 3 minute short clip of Bitcoins via the video below, or take a full 90 minute lesson here. (And by the way, the piggy bank analogy of Bitcoins is adapted from here.)
So, where do all these coins come from? Well, to go back to the analogy, there’s a robot in the room that runs lotteries and every 10 minutes, he puts 50 coins in a random piggy bank. Back when it first started, since there weren’t many piggy banks, it was easy to win the lottery. Today, there are millions of piggy banks in the room, so it’s much, much harder.
To get more technical, the “robot lottery” is actually Bitcoin mining. There are 21 million Bitcoins out there waiting to be mined and to date 10 million of them have been “found”. What happens is that a Bitcoin is actually a 64 digit code, an answer to a complex mathematical problem that computers solve, so technically everyone can be a Bitcoin miner.
That’s right, you can mine Bitcoins from the comfort of your home! But before you run off to start mining, I should tell you that depending on your computer, it’s probably not worth your time to do so.
Now, this is where it gets interesting. The problem with mining Bitcoins is the electrical efficiency of your hardware. For example, it might take you $500 worth of electricity to leave your computer running to find just 1 Bitcoin (valued at $143 at the time of writing), so you actually lose $367 just by trying to mine them. So people have come up with more and more efficient ways to mine them, to get to that 64 digit code faster and more efficiently.
While you can mine Bitcoins with your computer CPU (Central Processing Unit), some computers have a video card GPU (Graphics Processing Unit) which are better for mining (higher efficiency. But that too is slow, because they aren’t built to mine Bitcoins. What’s even faster are FPGAs (Field-programmable gate array) which can be programmed to solve these mathematical problems specifically.
But still, nothing beats ASICs (Application specific integrated circuit) which are designed from the ground up to mine. These chips are not usable in any other application, but mining and are the real speed demons in Bitcoin mining. So coveted that in a recent eBay transaction, someone paid a whooping $26,000 for a $2,000 ASIC.
There are really two ways to make money off Bitcoins: Mine them or, buy some and wait for them to appreciate in value, just like stocks. The race now is between companies who are coming up with even better designed, more efficient ASICs. Why is it harder and harder to mine Bitcoins you ask? Because the mathematical problem’s difficulty is automatically adjusted higher every time a Bitcoin is found to control the rate at which Bitcoins enter the economy.
As more Bitcoin miners enter the economy with their ASICs, the difficulty of the problems get adjusted higher and higher. As it is right now, you’re probably too late to the game as the early folks have already made their fortune! Sounds familiar? It’s the Gold Rush version 2.0.
As you can see, Paypal and Bitcoins are quite different. The former is a payment service like Mastercard or Visa, making payments more convenient, while Bitcoin dreams of revolutionizing our idea of money by being the first cryptographic, peer-to-peer currency, not backed or managed by any central authority, and transferrable without an intermediate financial institution.
As such, where Bitcoin brings about many advantages, it puts forward a whole host of concerns. For example, fuelling the Dark Web. Because of its anonymous, peer-to-peer nature, drug traders use Bitcoin as an ideal currency for their trade activities. Also, Bitcoin’s exchanges have historically been plagued by hackers, “stealing” millions of dollars worth of Bitcoins, leading to instability in the monetary system and a volatile exchange rate.
Another criticism is the lack of financial backing and regulation of its inflexible supply leading to minimal acceptance, although this is slowly changing with more and larger merchants accepting bitcoins.
Whichever side of the fence you’re on, there is no denying that Bitcoins is establishing a compelling framework for next generation currency, doing away with credit card companies, obliterating transaction fees.
Should you invest in some Bitcoins or even mine them with an ASIC? Everyone will have a different answer to this one, but find yours here.