Bitcoin Overview

In order to facilitate payments, a system is required to create money and then discern ownership of that money. In the real world, central banks print cash which can then be physically used to pay for things. The question of ownership in this case is simple since only one person can physically hold cash at any given time.

With digital payments, however, the issue of ownership becomes much trickier. Typically, we use the same currency, say the US Dollar, as the base for transactions, but we then need to rely on 3rd parties to validate who owns the money at any given time. These 3rd parties, such as PayPal or Visa, oversee and validate these digital transfers of money but at a monetary cost to the parties involved. Imagine if every time you wanted to buy something in a store, you first had to hand that money to an ‘official’ who would then inspect it, take a few pennies for his trouble, and then hand the remainder to the shopkeeper.

Bitcoin was conceived as a way to remove the dependence on any one 3rd party by instead relying on the consensus of a large peer-to-peer network to verify transactions. In order to do this, a whole new open-sourced currency called Bitcoin was developed that specified rules for the creation, ownership and transfer of units. No single person or authority controls Bitcoin, but instead a public ledger exists that contains a record of every single transfer of Bitcoin. This public ledger, the block chain, acts as the official record of who owns what and is hosted on and accessible by participants on the Bitcoin network.

In order to facilitate a transfer of Bitcoin, a secret piece of data called a private key or seed, is needed to sign the transactions between two parties. This acts as mathematical proof that the current owner of Bitcoin has authorized the transfer to a new owner. When this happens, that transaction is added to the block chain for all to see.

Maintaining and facilitating the Bitcoin network is very computationally intensive (as you can imagine a record has to be written and distributed to everyone on the network every time a transfer is made). To incentivize participants on the network to help with this computational challenge, the Bitcoin system rewards those who assist with new Bitcoins – what is called “mining”.

If all this does not make sense, don’t despair. There are plenty of resources online that provided more information. One resource you may find helpful is Bitcoin Simplified.

How to Buy Bitcoin

So great, you kind of understand what Bitcoin is. But how do you convert your US dollars or British Pounds or whatever other currency you have to Bitcoins? Well, just like with other currencies, you can either find somebody who has Bitcoin and wants to exchange it for your currency and make a deal, or you can rely on a 3rd party service that will enable the exchange for you. There are many different online exchanges out there with their own sets of rules. As a general rule-of-thumb, do your research on any exchanges you plan to use. Two of the largest and well-known exchanges that are often recommended are Coinbase and Bitstamp.:

  • Coinbase: Coinbase launched the first regulated bitcoin exchange in 25 US states on 26 January 2015. As of 2016, they operate exchanges of bitcoin with fiat currencies in 32 countries, and bitcoin transactions and storage in 190 countries worldwide. Note that this is a referral link to Coinbase that upon signup and purchase of 100 USD of Bitcoin will result in a 10 USD bonus.
  • Bitstamp: As of 2016 it was the second largest Bitcoin exchange by volume in the world. It allows trading between USD currency and bitcoin cryptocurrency. It allows USD, EUR, bitcoin or Ripple deposits and withdrawals.

We make no endorsement as to whether or not you should buy Bitcoin. Bitcoin can be an interesting addition to any investment portfolio, but comes with certain risks including the potential of losing your entire investment. We recommend you fully inform yourself on Bitcoin before making any decisions.

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