Bitcoin

I first heard of Bitcoin around 2010 and it was a head scratcher then, much like it still is today. I have read articles about the cryptocurrency here and there, as well as searched for an easy explanation via the web for years, whenever I heard it mentioned. Over this time I've gained only a rudimentary understanding of how it works.

Bitcoin was created in 2009 by Satoshi Nakamoto, which is assumed to be an alias for the true creator, or as more widely believed, a group of creators who are actually programmers living in the U.S. and Europe. One thing is for sure, whoever it (or they) is, they are quite wealthy at the moment. And I say "at the moment" because one Bitcoin had a value of $2,380.00 this morning and Satoshi is believed to own around one million Bitcoin. That is a lot considering all that will ever exist is 21 million Bitcoin. But there are people out there that believe the value of Bitcoin is in a bubble and once it bursts, it could send the value sliding south in a hurry.

So how is Bitcoin created? That is a great question. It's one I don't fully understand but I know it is produced by "mining." The process of mining is not done with picks, shovels or heavy machinery. Instead it is done by computers that take time running algorithms to confirm and log transactions on the public ledger, called a block chain. The reward for the work of creating a new block chain is new Bitcoin and that reward varies. It will continually get smaller and smaller until all currency has been created. At this time, when all Bitcoin has been created, the incentive for adding a new block and logging transactions would become transaction fees instead of new currency.

There are currently north of 100,000 merchants that accept Bitcoin as a form of payment. I have noticed the Bitcoin logo on the doors and windows of businesses in my travels. I have never used it personally though. This brings me to my next subject…how do you store and spend it once you have it? Well, it's called a wallet. And I'm not being funny. It's actually called a wallet. There are different types of wallets. Some are paper, some shaped like novelty coins, some are called hardware wallets and look like thumb drives or other chipped devices but each has its own address like email. The difference is that you would never use the same address twice and it's simple to generate a new address. Each wallet also has a code on it which acts somewhat as a signature called a private key for verifying each transaction.

It's still a somewhat confusing concept to me. But I found a great website that helped me understand it a little better. That site is www.bitcoin.org. This site has a great video along with links to even more information, including the original paper which describes its design authored by Satoshi Nakamoto. Maybe you can become confident enough in your understanding of Bitcoin to invest in it. But be advised, Bitcoin may be free of regulation from third parties such as banks and brokers, but it can't escape the federal government. The U.S. considers Bitcoin to be an asset and will tax its value as capital gains.