Tesla’s recent announcement that you can now buy one of their cars with Bitcoin has dramatically furthered the legitimacy of cryptocurrency and comes on the heels of other announcements from retailers like Overstock.com. Tesla’s move to back the cryptocurrency is “a potentially game-changing move for the use of bitcoin” to make retail purchases,” Wedbush Securities analyst Dan Ives said in a report to investors. “We expect less than 5% of transactions to be through Bitcoin over the next 12 to 18 months however this could move higher over time as crypto acceptance starts to ramp over the coming years.
What exactly is cryptocurrency?
Cryptocurrency is decentralized digital money, based on blockchain technology. You may be familiar with the most popular versions, Bitcoin and Ethereum, but there are more than 5,000 different cryptocurrencies in circulation. A cryptocurrency is a medium of exchange that is digital, encrypted, and decentralized. Unlike the U.S. Dollar, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among cryptocurrency users via the internet. Bitcoin was the first cryptocurrency, first outlined in principle by Satoshi Nakamoto in a 2008 paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” Nakamoto described the project as “an electronic payment system based on cryptographic proof instead of trust.” That cryptographic proof comes in the form of transactions that are verified and recorded in a form of a program called a blockchain.
What is a Blockchain?
A blockchain is an open, distributed ledger that records transactions in code. In practice, it’s a little like a checkbook that’s distributed across countless computers around the world. Transactions are recorded in “blocks” that are then linked together on a “chain” of previous cryptocurrency transactions. “Imagine a book where you write down everything you spend money on each day,” says Buchi Okoro, CEO and co-founder of the African cryptocurrency exchange Quidax. “Each page is similar to a block, and the entire book, a group of pages, is a blockchain.” With a blockchain, everyone who uses a cryptocurrency has their own copy of this book to create a unified transaction record. The software logs each new transaction as it happens, and every copy of the blockchain is updated simultaneously with the new information, keeping all records identical and accurate.
How is Bitcoin Mined?
The role of miners is to secure the network and to process every Bitcoin transaction. Miners achieve this by solving a computational problem that allows them to chain together blocks of transactions (hence Bitcoin’s famous “blockchain”). For this service, miners are rewarded with newly-created Bitcoins and transaction fees.
Although cryptocurrencies have seen a recent meteoric rise in value, ensure that you fully understand this volatile commodity before you invest.