Unless you’re living under an internet blackout, you’ve probably heard of Bitcoin—it’s a digital currency that doesn’t need a central bank, functions internationally, and keeps gaining value. Everyone wants a piece, but not everyone understands what it is.
Bitcoins are valuable, at least right now. There are a lot of guesses as to what’s driving bitcoin prices sky-high, and whether those prices will last before crashing back down again.
So is it worth investing in bitcoins? What are the security risks of using Bitcoin? And just what is the blockchain? The answers to all of these questions and more are in this Bitcoin cheat sheet. (Note: It’s Bitcoin when referring to the concept or network, and bitcoin when referring to “a unit of account.”)
What is Bitcoin?
Bitcoin (BTC) is the original decentralized cryptocurrency, a digital form of currency that uses blockchain and cryptography to validate itself. Prior to Bitcoin’s inception other forms of digital currency, and even cryptocurrency, existed, but Bitcoin was the first to decentralize the proof-of-work required to validate the coin’s legitimacy.
Centralized cryptocurrency is controlled by a single source, which means that source has complete control over its legitimacy, value, and other properties. Decentralization, by contrast, gives bitcoin value independent of a controlling agency like a government or a corporation.
Bitcoin uses blockchain technology to independently verify the legitimacy of a bitcoin. Each transaction on a Bitcoin blockchain is unalterable, making it a total public record of each use of the coin (or portions thereof).
The public nature of the blockchain makes it ideal for use as a currency verification system, as there’s no need to have a trust relationship with the other party: Proof of the legitimacy of the currency is inherent in its hash.
SEE: IT leader’s guide to the blockchain (Tech Pro Research)
Bitcoin was developed by a programmer or a group of programmers going by the name Satoshi Nakamoto. A paper published by Nakamoto in 2008 described the concept of the blockchain and Nakamoto’s intended purpose for it: The basis of a peer-to-peer technology cash system called Bitcoin.
That’s a far cry from the current value of over $10,000. Most of that growth came in 2017 alone—bitcoins started the year at less than $1,000 before skyrocketing to nearly $20,000 in late December.
How is Bitcoin different than other cryptocurrencies?
Bitcoin is the first decentralized form of cryptocurrency, but it’s certainly not the only one. A large number of blockchain-based cryptocurrencies have emerged since 2009, which raises the obvious question: How is Bitcoin different?
Aside from its much greater value, there are several things that make Bitcoin different from cryptocurrencies such as Etherium, Dogecoin, Litecoin, and others. All of these cryptocurrencies use blockchain technology, but the method and purpose of each one is different.
Etherium, one of the most talked about bitcoin alternatives, isn’t actually a value transfer platform; instead, it is used for distributed application programming. Etherium does have a monetary value in the form of its fuel, called Ether, but that’s just one part of its overall model.
Other cryptocurrencies, like Litecoin, Dogecoin, and PotCoin, use blockchains but don’t rely on SHA-256 encryption like Bitcoin does; they use Scrypt, a password-based key derivation function, to build coin hashes instead.
SEE: Bitcoin is hardly the only cryptocurrency investment (CBS News)
Bitcoin’s biggest difference from its competitors isn’t any of those code-related elements, though—it’s its sheer popularity and name recognition. Because it’s so well-known, Bitcoin is more heavily invested in by big players (e.g., governments). This has driven its price sky-high and made Bitcoin a household name.
Why are Bitcoin prices so high?
As covered by TechRepublic previously, the amazing rise in Bitcoin prices is largely speculative. Analysts I’ve spoken to nearly unanimously agree that the Bitcoin price surge is based on nothing but speculation and that, without any historic precedent to fall back on, it’s anyone’s guess how high Bitcoin will go before crashing, if it does at all.
Governments have been investing in Bitcoin, which is one reason prices keep climbing. The Chinese government has put its force behind Bitcoin mining in the country, which has prompted other countries to start stepping up their investments to avoid Chinese Bitcoin domination.
Bitcoin mining is the act of adding new transactions to the blockchain, which is done by solving complex mathematical problems. Solving a problem adds a transaction to the ledger, and more bitcoins are issued as the ledger grows.
All in all, the Bitcoin world is full of unknowns.
What are the practical uses for Bitcoin?
Practical use for Bitcoin and other cryptocurrencies has long been one of the major sources of criticism they’ve met with—it’s difficult to turn bitcoin into cash, which makes using it for purchases tough.
Businesses can still invest in Bitcoin and hope for a return, and there are a few places it can be used to make purchases. Buying things with Bitcoin can be tricky, though, especially since items aren’t often priced in BTC, which makes the value of the bitcoin itself irrelevant since it’s the cash value being used.
Digital economics researcher Owen Rogers specifically warns against pricing items in bitcoin due to its volatility—an item priced at 1 BTC today might result in a huge loss if bitcoins drop in price the way they have in the recent past. During the week of December 18, 2017, for example, bitcoins tumbled nearly 30% in value.
There are a lot of practical business uses for the blockchain technology that powers Bitcoin that don’t involve monetary valuation, which is perhaps the bigger takeaway from Bitcoin. Businesses can use blockchain to enhance security, build decentralized applications, make data redundancy simpler—it’s nearly impossible to list all the various uses, and more are being created all the time.
What are the security risks of using Bitcoin?
To find the crime, follow the money, and Bitcoin is definitely on the cutting edge of security risks. There have been a number of high-profile thefts of bitcoins, and apps that focus on cryptocurrency are often loaded with malware.
Bitcoin is anonymous, just like cash, which makes using it tempting for cybercriminals. Amassing bitcoins is necessary to use it, and rather than earn it by mining or exchanging fiat currency (declared by a government to be legal tender) for it, cybercriminals are more apt to try stealing yours.
That said, Bitcoin is becoming the less popular option among cryptocurrencies for cybercriminals, who are switching to Monero, Etherium, and other forms of cryptocurrency. That’s good news for those who want to use Bitcoin legitimately; it also means that bitcoin owners will be less of a target.
Being secure with your bitcoins means keeping a close eye on your digital wallet, only using trustworthy Bitcoin-related apps and websites, and being aware of the latest security trends in the Bitcoin world. It’s impossible to completely mitigate all security risks, but being smart and proactive, as with any form of cybersecurity, can save you a lot of headaches.
Should I invest in Bitcoin?
Businesses and individuals investing in Bitcoin are in for a wild ride, so don’t invest if you are averse to risk.
It doesn’t take much for the price of Bitcoin to tumble, as evidenced by prices the week of January 15, 2018, which was driven largely by the news that the vice governor of the People’s Bank of China (PBOC) wanted to end Chinese cryptocurrency investment. The day the news was released Bitcoin prices tumbled by 16% (over $2,000), as did the value of other major cryptocurrencies traded on Coinbase.
Bitcoin Cash, a fork of Bitcoin designed to be easier to use for actual purchases, was even more hurt by the news, losing nearly 20% of its value during the same timeframe. China moved quickly to put a stop to the rumors of ending cryptocurrency trade, but that didn’t cause a noticeable immediate improvement in the price.
On a larger scale, Bitcoin’s month from December 2017 to January 2018 was even rockier—it peaked in December at nearly $20,000, and within a month was down to less than $12,000. That’s a fall of almost 40%.
Take that as a warning to potential Bitcoin or cryptocurrency investors in general: It’s not a sure thing, and it may have already hit a peak.
Those doing business internationally, however, may want to give Bitcoin a second thought. As American Express points out, Bitcoin has a relatively quick transaction time, so volatility won’t necessarily be an issue; accounts are international, so there’s no need to keep multiple portfolios of currency; and there’s no credit risk since the sender has to have the bitcoin in her wallet to make a purchase.
Bitcoin isn’t a flawless international payment system. Numerous countries have banned Bitcoin and other forms of cryptocurrency, and exchanging Bitcoins to local currency can take time, at which point volatility can cause an extreme change in value, which can affect the sender and the recipient.
There’s a lot of potential in Bitcoin, but that doesn’t mean you should rush out and invest in the digital currency, though: Wait for some cryptocurrency market stabilization or a practical use to emerge before committing company money that could disappear overnight. It’s also worth seeking advice from a professional financial consultant before investing large amounts of money in bitcoin, or anywhere else for that matter.
How do I get started with Bitcoin?
Bitcoin is confusing, and getting started can be daunting if you don’t know who to trust or where to begin. What do you need? How do you buy bitcoins? Where is it safe to store them?
There are several different options for a Bitcoin setup, and the biggest decision to make is what kind of digital wallet to use to store your coins. Some wallets are hosted online, others are mobile apps, and you can even set up a wallet to be completely local on your machine.
One of the easiest platforms for beginners is Coinbase, where you can buy, sell, and store bitcoin. Coinbase eliminates a lot of the manual setup and hassle from the Bitcoin process.
Once you’re ready to move on to a more advanced mode of operating, or if you plan to hold on to your bitcoin for a long time without doing any cryptocurrency trading, it’s a good idea to put it into a separate wallet app. There are a variety to choose from, and using one means the bitcoins you have are yours alone—if you leave them online with Coinbase or another hosted wallet, your bitcoin is never in your hands directly. Long-term investors and serious bitcoin users should plan to go this route eventually.