What the Heck is Bitcoin?
What the Heck is Bitcoin?
Imagine you’re in a room full of people.
You ask the room who’s heard of bitcoin… a ton of hands shoot up.
You nod your head. This is what you expected.
But you have one more question: “Who actually knows what cryptocurrency is?”
More than half of the hands go down…
Throughout the Money Revealed docuseries cryptocurrency is a recurring theme.
Some of the financial gurus we interviewed think it’s a waste of time, while others believe that it has the potential to change the world.
To be able to determine which way you lean yourself, it’s important to be able to answer the second question you asked the room, so I did a little research…
What Is Cryptocurrency?
Cryptocurrency is what we call a digital currency, meaning it only exists via computers and the internet.
The big banks aren’t involved in the mechanics of this type of currency. Because of that it’s simply transferred between peers.
Each and every transaction is recorded on a digital public ledger aka blockchain.
The data from each transaction and the ledger are encrypted using cryptography. This is why it’s called “crypto” currency.
Cryptocurrency is decentralized. This means that it’s controlled by users and algorithms, not the central government.
The blockchain is hosted on computers all over the world. That is how the currency is distributed.
You trade cryptocurrencies on online exchanges, similar to the New York Stock Exchange, except they’re dedicated to the digital currency.
You’ve probably heard of bitcoin before. That is just one of the many cryptocurrencies there are. Any alternative to bitcoin is called an “altcoin.”
Another question you’ll want to know the answer to is…
How Does Cryptocurrency Work?
Each transaction is sent between cryptocurrency owners using a type of software called a “cryptocurrency wallet.” The person facilitating the transaction uses their “wallet” to transfer funds from one account to another.
To be able to transfer funds, you have to know the password associated with the account. This is also referred to as the “private key.”
Each transaction is recorded in the blockchain.
All users of a specific cryptocurrency have access to the ledger if they so choose. They will be able to see the amounts, but who sent the transaction is encrypted.
Every transaction leads to a special set of keys and whoever owns a set of keys owns the amount of cryptocurrency connected to that set of keys.
Multiple transactions are added to a ledger in “blocks” of transactions. That is why the ledger and its technology are called “blockchain.” It is a “chain” of “blocks” of transactions.
To learn more about blockchain, click here to read our previous issue explaining it.
Let’s Wrap It Up…
There are plenty of nuances when it comes to cryptocurrency, so it is a topic I may revisit.
But now that you have the basics, it’s time to take things into your own hands and do some research.
Just like with any other investment, don’t do it until you’ve done your homework.