The value of Bitcoin has been on the upswing lately – in fact, one Bitcoin, as of writing, costs a bit over $9000 of our beloved Monopoly money. Such a meteoric rise may have you interested in what this whole “cryptocurrency” thing is about. Here’s what you may want to know.
First off, the foundation of Bitcoin, and most subsequent cryptocurrencies: the blockchain. All it is, at its core, is a combination of a few existing concepts, including:
Linked lists: A data structure you’ll be familiar with if you’ve taken Computer Science past the intro classes. A linked list is made up of nodes, which each hold a bit of data (exactly what depending on what it’s used for) and a link (hence the name) to another node.
Peer-to-peer networks: Ever, uhh... downloaded a movie or album off the Internet? If so, you’ll probably recognize this. Instead of downloading an entire file from one server, a piece of client software downloads bits and pieces of it from several different servers, all of which have a complete copy of the thing you’re downloading. This allows for decentralization: no one server has the sole authority to give or deny you the file.
Cryptography: The basis behind all secure communications on the Internet, from online banking to even a lowly Google search (at least these days). In a good system of cryptography, you can easily encrypt a message, but you can’t easily decrypt a message unless you know a key to do so.
Bitcoin’s blockchain is used to store a ledger of all transactions that have ever happened in the currency’s history, with each new node added to it containing the most recent transaction data. Because of its peer-to-peerness, it is extremely hard for any one party to use a fudged blockchain in order to grant themselves more money.
The Bitcoin system was designed so that no more than 21 million Bitcoin will ever be produced. If you consider that, according to the United States Federal Reserve, there are about 1.2 trillion US dollars in circulation (as of July 2013), this means that if Bitcoin were to catch on as a popular currency, just one would be worth a lot. It would continue to increase in value relative to traditional currency, too, as Bitcoin doesn’t inflate. However, it is divisible in denominations up to one ten-millionth, meaning that evern after factoring in exchange rates, you can still divide a Bitcoin into much smaller pieces than a US dollar.
Bitcoin was designed to be used as a currency. Just like you can purchase something with a wad of paper bills, you could send someone a few (these days, thousandths of a) Bitcoin, and reap all of the advantages that come with it – greater security, no inflation, no governmental authority for the currency to answer to, and so on. However, the Bitcoin network is so slow and inefficient at processing transactions, compared to other cryptocurrencies, that it is most often thought of these days as a “store of value.” Compare it to gold – gold has worth, and can be (and was once) used as a currency, but it isn’t very often that you’ll find someone paying for groceries at a supermarket with it. Nevertheless, there are online retailers who do accept Bitcoin for payments, as well as some other popular cryptocurrencies.
But why is a Bitcoin worth anything at all, being just some data on the Internet somewhere? Ask yourself this: why is a five-dollar bill worth five dollars, when the polymer it’s made of is only worth a few cents? Why is that polymer worth a few cents, anyway? There’s a lot more nuance to the debate on currency’s intrinsic and extrinsic value, but a good place to read up on this, if you so desire, is The Age of Cryptocurrency by Vigna and Casey – the Brandon Public Library has a copy.
Interested in any of the other details, such as how to obtain and use Bitcoin, as well as other cryptocurrencies? The Internet is your friend. A good place to start is /r/bitcoin’s FAQ. Or, if you’re interested in other cryptocurrencies, look at Wikipedia’s list of cryptocurrencies, find one that looks interesting, and research it. A vast sea of information awaits, if you’re willing to explore it.