What is Bitcoin and can I buy one?

Bitcoin. Everyone has heard of it. It's the currency of criminals. It can make you a millionaire overnight. It's illegal. It's a community of conspirators...

Well, not quite.

The purpose of this article to try to give a very simple explanation of the utility of Bitcoin. It’s not aimed at Bitcoin natives and investors but rather to the group who have heard about Bitcoin and want to know more about it – but without the technicality nor the hype.

I hope it's useful...

What is Bitcoin?

Bitcoin is a currency(1) just like the US dollar.

It has an exchange rate to other currencies and it can be used to purchase goods and services at places where the currency is accepted. However just as you couldn't spend a US Dollar everywhere, so you can't spend Bitcoin everywhere.

Bitcoin is a wholly digital currency which actually doesn’t make it very special at all. In fact it makes it like 95% of the world’s money supply – meaning that it does not exist in the form of physical coins or notes.

However what makes Bitcoin distinct when compared to traditional currency is that it is a crypto-currency which is a reference to the encryption mechanisms which control how the money supply of Bitcoins is controlled, how anonymity is assured and how transactions based on Bitcoin are validated. It’s not unique however - there are almost 1’000 crypto-currencies out there(2). However it's probably safe to say it’s the most well-known as it was the first.

Isn’t it only criminals who use Bitcoin on the “dark web”?

No. It’s true that Bitcoin was used in its early years as a way to do illegal business on dark-web sites like The Silk Road. Bitcoin acceptance by legitimate merchants is, however, growing – Virgin Galactic, Wikipedia and Microsoft are now some of the big names accepting Bitcoin payments.

Who regulates Bitcoin?

There is no central bank which controls or regulates Bitcoins and this is one of the biggest traditional reasons why people are drawn to this currency. Having a common currency, free of geographical borders broadly means that the need for a bank – or other financial intermediary – is no longer necessary. Users could exchange Bitcoins directly with one another in a so-called peer to peer approach. The absence of a financial intermediary, however, does mean that many of the validations that go with that intermediary such as “does customer A have the necessary funds to make this transaction to customer B” were also absent.

To address this, Bitcoin leverages the block chain. The block chain is a way of having other users on the block chain network act to validate that transaction. In effect, it is the consensus power of the network which validates and it is this that negates the need for a trusted financial intermediary. For an explanation on Blockchain in under 100 words, see my previous post here.

Can I buy Bitcoin?

Yes – you can. Just as anyone can purchase traditional currency or a traditional asset, anyone can purchase a Bitcoin or denominations thereof.

Each Bitcoin is worth – at the time of writing – approximately $5’000. If that seems quite steep, you can also buy denominations of Bitcoins down to 1 hundred-millionth of a Bitcoin(3)! However because you cannot physically walk up to a Bureau de Change and ask for Bitcoins (or at least not yet!), the buying or selling of Bitcoin happens online.

The process to buy a Bitcoin is very simple and in many respects is similar to opening a share-dealing account. You open an account (with a Bitcoin exchange like Coinbase or Kraken - other providers are available), transfer a balance of traditional money from your bank account into your securities account (or pay higher fees and make a purchase immediately with a credit card) and then issue a buy order against Bitcoin. In the world of Bitcoin, however, your account can also be called your “wallet” so-called because it stores your Bitcoins (or rather the unique identifiers to your balances)(4).

Should I buy Bitcoin?

This is a more complicated question. For the answer, you need to start to think of Bitcoin like a highly volatile asset or an early start-up investment. The price of this asset varies wildly – to a much greater extent than a traditional asset. Its value can plunge and rise to double-figure percentages in a single afternoon. Many people have become millionaires many times over from early Bitcoin investment and it’s true that the trend has been to rise, however it’s a volatile investment and should be treated as such.

Happy spending!

All views my own.

Notes

(1) The purists will argue Bitcoin should be classed as an asset rather than a currency due to its inherent volatility. Furthermore, Bitcoin is also technically a digital payment system in addition to a crypto-currency – which makes transactions possible. For the simplicity of drawing parallels and not to get too technically detailed, I’ve referred to it as a currency with an exchange rate for the sake of this article

(2) As of July 2017 there were over 900 cryptocurrencies available over the internet (see coinmarketcap.com)

(3) This unit is called a satoshi named after the creator(s) of the Bitcoin - Satoshi Nakamoto. The satoshi is, in fact, the common denominator for all amounts on the block chain.

(4) Public key cryptography on the block chain is the most complicated part of explaining Bitcoin - and probably deserves a separate article. For the purposes of this session, it's enough to say that Bitcoins don't actually exist. What exists is rather a chain of digital signatures - or a chain or ownership - stored on the block chain. As transactions happen, balances on this ledger increase or decrease as each owner transfers Bitcoin to the next owner in the chain. Cryptography refers to how these transactions are mathematically secured made between parties.