Demystifying Bitcoin: How does it work?
Bitcoin is a cryptocurrency created in 2009 in response to the 2008 market crash. The idea was to escape the “too big to fail” banking concept. The concept was to create a decentralized network of trust where transactions could be recorded, rather than relying on a bank to be the intermediary for nearly every transaction taking place between buyer and seller.
Cryptocurrencies are digital currency. They exist only on hard drives or cloud servers. These encrypted sets of data are protected from copying or tampering by blockchain technology. But if you lose your key—or, forget your password—then you are out of both luck and money. Nearly 64% of Bitcoins in existence sit unused, with part of that due to lost keys.
And What Exactly Is A Blockchain?
Blockchain technology uses peer-to-peer (P2P) networks to verify data. Matching data is saved while mismatches are discarded as fraudulent. The series of blocks in the chain effectively provide a timeline of events, acting as a distributed ledger. Because of how blockchain works, you cannot tamper with a block without also altering the rest of the chain and taking over more than half of the P2P network.
Big Names Weigh In
Some of the richest men in the world have thoughts on Bitcoin. Warren Buffet warns us to stay away from Bitcoin, believing it to be too volatile because its value is too reliant on the U.S. dollar. Elon Musk finds it exciting. While concerned about the anonymity easing illegal transactions, he questions whether some things shouldn’t be illegal anyway. Richard Branson says high risk can equal great returns, so grab the money while it’s there.
Other Uses for the Tech
Julian Assange is fascinated by blockchain technology’s potential outside of currency exchange. He employed the technology at Wikileaks to help prove when a document was published and prevent tampering with the text. Other suggested uses have been for storage of medical records, digital notary services, and even collection of tax payments.
With Great Risk, Comes Great Responsibility
Because the value of a Bitcoin can fluctuate so greatly, there is a lot of risk to investing in it. There is a risk that you could lose the drive you stored your wallet on. In 2013, James Howells accidentally threw away a hard drive that contained $7.5 million worth of Bitcoins. If you choose to store in the cloud, it could be hacked. Additionally, the anonymity of Bitcoin could facilitate easier criminal transactions. There was a scandal with a black market website called Silk Road, whose users paid in Bitcoin.