Bitcoin is a hot topic these days, yet the technology is an elusive concept for many people. I researched it myself one day to try and understand what bitcoins are and how they work. Here is what I found out…
Bitcoin is a type of cryptocurrency. Cryptocurrency is not government-issued or centrally administered by a bank, nor is it backed by tangible securities. Crypto is a digital currency created through a cryptographic process involving complex algorithms and computational puzzles. The technology behind it is something called blockchain.
Blockchain is a type of decentralized ledger database system in which a record of transactions is maintained across multiple computers linked in a peer-to-peer network. Blockchain allows for the safe transfer of digital assets from one person to another as long as a set of programmed conditions is met. This eliminates the need for “trusted” third parties such as payment processors.
Bitcoin was the first blockchain-based currency, so it’s the most famous, but it’s not the only cryptocurrency. A couple of others are Litecoin and Ethereum. Physically there is nothing to hold – cryptocurrency is purely digital money stored in virtual wallets – although crypto can be exchanged for cash.
One of the advantages of cryptocurrency is that it can be stored offline on a secure hard drive, so no bank account is needed. The only problem is, if a person loses access to the hard drive that contains the Bitcoins, the currency is gone forever. (And hackers can still steal it, as thousands of investors found out on August 10, 2021, in what was called the biggest cryptocurrency robbery ever.)
Cryptocurrencies are, by design, hard to track, and Bitcoin transactions are anonymous. Bitcoin has been criticized for its ease of use in illegal transactions. Banks don’t like it (for obvious reasons, until they can figure out a way to make it worth their while), and governments haven’t figured out how to tax it yet.
Bitcoin mining is the process of solving complex hexadecimal puzzles to earn new coins. Cryptocurrency essentially hides the coin behind a very large password. If you can crack the code, you get the coin. Bitcoin aims to generate one coin every ten minutes. When few people were vying for the coin, it was easier. When many people are vying for the coin, it’s harder. That’s what makes the price go up, not to mention they’re very rare in the first place.
Last month, El Salvador became the first country to adopt Bitcoin as legal tender. Some retailers like Newegg and Overstock also accept Bitcoin. In February, Tesla announced that it would accept cryptocurrency for the purchase of its electric cars. The company backtracked in May when CEO Elon Musk expressed concerns about the amount of electricity used in Bitcoin mining. In June, Musk said the company will begin accepting Bitcoin when mining operations are powered by at least 50% renewable energy.
Bitcoin’s carbon footprint should be a big concern of anyone who cares about green issues. The cryptocurrency market has expanded so fast that it’s gobbling up vast quantities of energy. Mining a single Bitcoin involves multiple high-powered computers trying to decipher a really complex mathematical puzzle. The computers used in Bitcoin mining consume about 100 TWh (TeraWatt Hours) of all the world’s electricity. That’s enough to run a small country! Two-thirds of Bitcoin is mined in China, using data centers that rely on electricity generated by coal.
Bitcoin’s future may look promising, but it’s hard to recommend as an investment because its value is so volatile. The crypto’s ultimate fate as a successful currency will depend on its energy usage. Many environmentalists and green investors are concerned about the rapidly increasing use of fossil fuels for Bitcoin mining. “If Bitcoin were to be adopted as a global reserve currency,” said economist Alex de Vries, “We’d have to double our global energy production. For Bitcoin.”