I admit I am not at all savvy on the world of crytpcurrency. There are so many articles and videos about it, it’s rather daunting to figure out what is what and who is right. I hired someone who has the knowledge to write me the basics or the 101.
This is the first of several articles/post on crypto/bitcoins! Enjoy!
Understanding Bitcoin: A Beginners Guide to Cryptocurrency
Do you risk being left behind by the cryptocurrency revolution? If you are a freelancer and struggle with understanding Bitcoin (and cryptocurrency in general), there is a chance that you might.
In the United States, 38% of freelancers already regularly use cryptocurrency. As of 2019, there are also more cryptocurrency-powered freelance platforms coming to market than ever previously. Below, we’ll, therefore, explain in simple terms what cryptocurrency is, and why cryptocurrency appeals to some freelancers.
What is Cryptocurrency?
At it’s most basic, the term ‘cryptocurrency’ refers to any digital asset designed to be used as a medium of exchange. Bitcoin is the world’s oldest and most famous cryptocurrency. However, at present, there are over 2,000 different crypto coins.
Of course, descriptions like the above don’t make understanding Bitcoin or cryptocurrency, any easier. As part of an introductory cryptocurrency crash course, we’ll, therefore, focus for now on just the fundamentals of Bitcoin.
What is Bitcoin and How Does it Work?
Understanding Bitcoin starts with understanding how regular cash works.
Contrary to what you might think, banks don’t hold depositor funds in high-security vaults. They can’t. The value of U.S. dollars in circulation only amounts to $1,463 billion. If shared out equally, this would amount to just $4,500 per U.S. citizen.
What banks do instead, is use a transaction ledger (similar to an excel spreadsheet), which ascribes certain amounts of wealth to specific individuals. You see the front end of this system whenever you check your account balance.
Digital Currency Vs. Regular Cash
For the most part, banks do a good job maintaining the accuracy of their transaction ledgers. However, there are flaws in the system.
If everyone attempted to withdraw their balance at once, banks would collapse leaving depositors penniless
Centralized control means that banks and governments can freeze and confiscate deposits at will. (This happened in Cyprus in 2013)
Bank IT infrastructure is susceptible to hacking
Bitcoin addresses the above concerns.
At its core, Bitcoin is a transaction ledger, just like that used by regular banks. This ledger records the real-time whereabouts of a fixed number of 21 million Bitcoin. More importantly, the Bitcoin transaction ledger is impossible for any individual to hack, edit, or interfere with in any way.
Understanding Bitcoin from a Security Perspective
Bitcoin differs from bank transaction ledgers in how the Bitcoin transaction ledger is managed.
The ledger itself is encrypted and decentralized. This means that it is not owned or managed by a single entity. Instead millions of individuals who mine Bitcoin (which we will cover in Understanding Bitcoin Part 3), maintain an exact copy of the Bitcoin ledger.
Of course, whenever anyone transacts Bitcoin, the Bitcoin transaction ledger needs to be updated. To do this, all miners must unanimously agree that pending transactions are valid. Once they do, new data is added, and worldwide copies of the Bitcoin transaction ledger are synchronized to ensure accuracy.
The way Bitcoin is structured means that:
Bitcoin payments can ever be reversed
No third party can ever freeze or confiscate Bitcoin balances
Being encrypted and decentralized makes Bitcoin impossible to hack
More importantly, the number of Bitcoin in circulation always matches the actual number of Bitcoin in existence. Many people, therefore, consider Bitcoin a safer store of wealth than fiat cash.
Of course, understanding Bitcoin is different from understanding how to use cryptocurrency. However, this and more will be covered in Understanding Bitcoin Part 2.