Bitcoin is a digital currency that’s anonymously transferred between persons (peer-to-peer). Bitcoin is a crypto-currency (cryptographic) that is generated through digital mining. Mining is the process of your computer (via graphics card or CPU) solving very complex math equations, or guessing very long numbers. The first computer to get it right receives a block reward of Bitcoin. The block is a pre-determined amount of coins that is awarded to the winner. Multiple people can win this bounty by participating in a mining pool – a network of computers all mining together. If one of the computers in a pool guesses the correct number, the pool will split the reward between all members based on participation and contribution. There are those who do not participate in a mining pool, and they typically have a very large amount of computers (processing power) to increase their chances of finding the next block. Sometimes they rent mining power, though it’s questionable whether or not it would be better to have simply purchased Bitcoin instead of mining power.
The block mining rewards cut in half every so often. This is called a halvening. The last halvening (as of writing this) was in mid-2016. The next halvening will be approximately June 10, 2020. It’s a major event because the perception of miners receiving fewer Bitcoin has a noticeable impact in the price of Bitcoin (though not for very long). This creates a controlled supply of Bitcoin, and you can think of that as a sort of reverse inflation. The influx of Bitcoin coming into the market gets smaller and smaller until it stops altogether.
Miners will still benefit from mining Bitcoin, even when enough halvenings make it seemingly unrewarding to mine for new Bitcoin. That’s because, as miners discover new Bitcoin blocks, they also verify transactions. When you transfer your coins to another person, you’re making a permanent stamp in the ledger, which is a publicly available report of every transaction ever. Given the many millions (or more!) transactions, you can see how large of a file this ledger is. In order to transfer to another person, you pay a transaction fee. This is much like a fee for withdrawing money from an ATM. However, compared to the traditional financial institution, a transaction fee is relatively small. (As of writing this, there’s a great big talk about whether or not the current transaction fee is too high based on the amount of people transferring Bitcoin at once.) You can view the number of unverified transactions waiting for the next block here. These are people who have recently sent Bitcoin to another person or organization whom are waiting for their transaction to be verified.
Transactions must be verified in order to be deemed valid. In order for the transaction to complete, enough computers on the network must agree, “Yes, the data matches up; according to the history of Person A, they indeed have received as many or more Bitcoin than they are sending to Person B.” And then, after transaction, “Let’s make a note in the ledger than Person A transferred X number of coins to Person B. If Person A tries to trick Person C into thinking that they have coins to send them, we’ll be able to see that, based on the history of transactions, Person A does not have coins to send.”
This transaction verification is absolutely necessary, and each transaction must be verified by enough computers before it completes in order to prevent fraudulent and falsified transactions. Of course, hypothetically, if enough computers purposefully say, “We choose to say that Person A has enough coin to transfer to Person C, even though they really went to Person B,” then coins really would transfer to Person C. This is called a 51% attack because more than half of the computers on the network must agree with a falsified transaction in order for it to really go through. This has been a threat to the Bitcoin ecosystem in the past, but it has never caused any tremendous scares or damage.
Back to the miner rewards. After enough Bitcoin have been mined to make the block reward unsubstantial, then miners will still collect the transfer fees. These fees are always ensured to be significant enough to make mining worthwhile because, the fewer people mining, the higher the mining reward. This is an equilibrium ensuring that there will always be enough computers connected to the network to verify transactions.
Many new Bitcoin enthusiasts subscribe to the [surprisingly] common misconception that you must buy coins in whole numbers. You do not have to buy one whole Bitcoin, you can buy a fraction of a bitcoin, down to one-one-hundred-millionth. This smallest unit of Bitcoin is called a satoshi, named after this coin’s creator, Satoshi Nakamoto. Nobody knows who Satoshi is, but there are many theories and much speculation as to who that could be … or if he’s still even alive. Satoshi took part in Bitcoin in the very beginning, but he later dropped out of communication entirely.
The psychological impact of purchasing something smaller than one whole Bitcoin has prevented many enthusiasts from getting involved in this crazy world. It may be that, in the future, the average upper-class individual may not be able to buy one whole Bitcoin even if they dumped a large sum of money. Therefore, the public will eventually have to recognize a smaller value of Bitcoin to be the commonly referred to value. Some believe this will be a Millibit, which is 0.001 Bitcoin, or one-one-thousandth. As of writing (the market is very crazy today) the value of a Millibit in USD is $14. This is a much more digestible and tangible number for new investors, because it’s quite easy for the average person to purchase one Millibit. By thinking of something much less than one whole Bitcoin, there’s a lot less intimidation in the thought of purchasing something “less”. New investors are encouraged to think of, “How many Millibit would you like to purchase?” This makes the gateway investment more approachable by the average person
Another huge misconception is to think, “It’s too late to invest.” So many hundreds of thousands of people worldwide feel that they missed the train because they could have purchased one or more coins in the past, but now they can’t even buy a half of a coin. This is a very negative view that perpetuates their unwillingness to finally get involved. Other investors will approach other cryptocurrencies fashioned after Bitcoin, called Alternative Cryptocurrencies or AltCoins. You may have heard of names such as LiteCoin, Ethereum, Dash, Monero, and even Dogecoin. These coins all follow the same principles (though with some variation) as the “brand name” of Bitcoin. Therefore, an investor might be more willing to invest in Litecoin ($100 USD each as of writing) because they are able to afford a few.
However, by investing in an AltCoin, you’re essentially saying that you believe that this coin will be more successful in the short- or long-term than Bitcoin. Otherwise, why would you not just use those investment dollars to purchase an equivalent fraction of a Bitcoin? You can begin to see how one’s psyche may twist how somebody approaches investing in cryptocurrency.
Therefore, a recommended way to get involved in Bitcoin is to buy one, or several, Millibits. This is enough to allow you to boast, “I’m involved in the Bitcoin movement” even if just a fraction! After you make your first “gateway” investment, you’ll find that it’s incredibly easy to buy more over time. In the Beginner’s Bitcoin Guide one of our members wrote, you’ll learn effective strategies how to invest small, invest often which is a very bite-sized way to approach this digital coin.
This about wraps up the super-simple summary of Bitcoin. I hope you enjoyed reading this, and most of all, I hope you learned a thing or two. The crazy thing is … I barely touched the surface! There’s so much going on … it’s more than just numbers. Therefore, one of the best things you can do is spend a few hours reading guides like this and learning all about the many facets of Bitcoin… because may just be like a new financial language that the entire world will speak in due time. And, as they say, knowledge is power.
Take care. Invest small, invest often, and brace yourself for a wild, wild ride.