SPECIAL REPORT: What is Bitcoin, how does it work?
(WENY) -- Bitcoin has been making headlines for the past couple of years now, but many people may not understand how it works.
According to Steven Novakovic, Instructor of Finance and International Business at Ithaca College, "Bitcoin is a type of crypto currency, and a crypto currency is the idea there is we want to have something that is like a currency, like something you can use to pay for stuff but that's anonymous and decentralized."
Bitcoin was created in 2009 by a man under the name of Satoshi Nakamoto, which is more than likely a pseudonym. The true identity of the person who created it is still unknown to this day. There's speculation that the person who invented it could actually be dead.
Bitcoin mostly operates like all of the other cryptocurrencies that currently exist; more than 6,000 of them! And it's not actually a coin at all.
So let's assume you have some Bitcoin, how do you spend it? First and foremost, the person or business that you would like to pay with Bitcoin has to accept it. When you "send" Bitcoin to the other party, you're essentially sending a transaction request to the Bitcoin network. This network, made up of millions of computers, uses a blockchain and keeps records of every Bitcoin in existence, and transactions since the beginning of Bitcoin. The blockchain is like a giant ledger, or spreadsheet. In short, the blockchain verifies your balance, and it ensures that the Bitcoin you are trying to send hasn't been spent twice by you. Once the transaction is verified, the new balance is updated for both parties.
It's a lot of work, but who verifies it and maintains it?
"You need to have some ecosystem or infrastructure in place to make it run, so how would anybody confirm that I have given you a Bitcoin, you have given me a Bitcoin, who tracks this stuff, right? So the way the person came up with it, they came up with this elegant solution -- let's create a system where everybody is involved," explains Novakovic.
This is where Bitcoin miners come into play. A Bitcoin miner refers to a specialized machine or a piece of hardware. The piece of equipment is tasked with solving a difficult algorithm, "And those complex algorithms basically verify transactions between parties -- and a small transaction fee for each exchange is taken out," said Novakovic, "Everybody is involved in trying to keep the ecosystem afloat but only a select few will be actually able to solve this puzzle and it's the computer that can solve the puzzle first that gets this reward of free Bitcoin."
The mining reward is made up of transaction fees -- like a bank's ATM network, but without a bank. The mining network involves many checks and balances by involving many miners. Every transaction is verified by multiple miners. This whole process typically takes a few minutes.
Right now (April 2021), each Bitcoin is valued at roughly $50,000, and it's being viewed as a store of value similar to gold in the financial sense but on steroids. Its wild behavior attracts negative attention.
During an event in 2017, Jamie Dimon, CEO of JPMorgan Chase, said "If you're stupid enough to buy it, you'll play the price for it one day." Compared to gold, the price of a Bitcoin could jump or fall much much faster and you don't actually have anything physical to hold. But it is easier to trade, and you can cash it in within minutes from your home.
Bitcoin along with most cryptocurrencies can be stored online or even on a piece of paper, using a QR code as a type of digital wallet.