Bitcoin FAQ
These are some of the questions I get asked most often about Bitcoin.
Who created Bitcoin? Where did it come from?
Bitcoin was created by a pseudonymous programmer known as Satoshi Nakamoto. No one is certain of the identity of Satoshi. He/she/they released the whitepaper in late 2008 and the first block was mined in January of 2009.
However, the Bitcoin project was based on the work of previous groups who aimed to create a digital money that was independent of any central organization. Projects like e-gold and Hashcash were two earlier attempts that preceded Bitcoin. Bitcoin’s success came from its ability to solve the double spend problem.
The fact that Bitcoin’s creator is unknown is a testament to what has been achieved with its invention. Bitcoin is designed to be a decentralized platform, accessible by anyone, and controlled by no one single entity. Bitcoin has no face because it is an entire network comprised of individuals and groups all over the globe. Unlike Google or Facebook that are centralized organizations with executives, Bitcoin is a set of rules without rulers.
Who controls the network?
The beauty of Bitcoin is that no one individual or group controls the network.
The Bitcoin network has a four-sided effect:
Miners secure the entire network by exchanging energy in order to compete for fees and the reward of newly produced bitcoin
Holders participate in the network by saving or storing bitcoin. This is where the majority of people fit in - those who want to use the asset as a store of value.
Buyers/sellers of bitcoin are looking to either accept it in trade or are looking to spend it on goods and/or services.
Developers spend their time and energy to create the tools, wallets, and ecosystem for the entire network.
Why can’t I spend my bitcoin anywhere? Why does no one “accept” it?
This is the wrong lens to see Bitcoin through. Bitcoin does not intend to solve the problem of being able to transact with another person quickly and at low cost. We already have the capability to exchange at scale through channels like Visa, Venmo, etc. Bitcoin provides a solution on the settlement layer of transactions.
We must compare Bitcoin to its direct competition in order to accurately understand how profound of an invention it is. Imagine the time and cost necessary to wire 1 million dollars to another country. The process will likely take several days and cost a significant amount. Bitcoin allows users to finally settle with other users anywhere in the world within an hour. This is all done without the need for a third party - no need for Visa, SWIFT or any other intermediary. When you send Bitcoin to someone, it goes directly from your wallet to their wallet.
It is simply not very cost effective at this point in time to use Bitcoin for small, everyday transactions. When thinking about Bitcoin, remember that it is not trying to become a better Visa, it is becoming a global settlement layer.
Can Bitcoin be hacked? Can someone steal my bitcoin?
As far as the entire network is concerned, it is very difficult to hack or have someone compromise the network’s integrity. Bitcoin is the most powerful computing network in the world. Thousands of people all over the globe operate what is called a node. Someone who runs a Bitcoin node taps into the distributed ledger technology behind the Bitcoin blockchain. They verify for themselves each block of transactions that takes place on the chain and ensure the supply limitations stay in place. A revolutionary feature that Bitcoin facilitates is the ease at which anyone can run their own full node in order to verify that Bitcoin is working the way it is intended to work. Since the technology is vastly distributed, open-source, and has developed remarkable network effects, Bitcoin has become well-protected from hackers looking to manipulate the system.
On a personal level, securing your bitcoin requires extreme ownership. It is entirely up to you on how you want to secure your funds stored in bitcoin. This point should be made very clear, though: there are tradeoffs to every method of storing your funds. It is all a matter of what level of security you require and how you want to set up custody of your coins. You may choose to leave your bitcoin in the custody of the exchange where you bought them, and there are obvious risks with this strategy. You could also decide to take custody of your coins and secure them in numerous ways with different wallet options. Overall, if you use take proper security precautions, your funds will be stored safely, while poor safety measures may result in a loss of funds.
What is Bitcoin “backed” by?
I believe when people ask this question they are really asking “Why does anyone else value bitcoin?” or “Why does anyone have trust in this bitcoin thing?”
We have grown so accustomed to the government being the party responsible for monetary policy that many people believe government to be the source of money. In reality, governments and central banks have only controlled money for less than 100 years. For the vast majority of human history, the market was the decider of money. The most tradable thing in an economy becomes money - ultimately, the world settled on gold.
Bitcoin stands to take gold’s throne as a market-chosen tool that has stronger network effects and monetary properties than anything else. This is what gives Bitcoin value (in other words, what it is “backed” by) - its network and its properties.
Like we mentioned before, Bitcoin has a powerful 4-sided network made up of miners, holders, buyers/sellers, and developers. If you read some of the other pieces, you will know that Bitcoin has properties that make it sound money: divisibility, scarcity, decentralization, portability, etc.
What about other cryptocurrencies?
There has been no other proven use case for a blockchain besides Bitcoin. Other cryptocurrencies make claims that they solve specific problems that people should desire for x, y, or z. Speaking candidly, most other cryptocurrencies are scams designed to take investors’ money and give it to the organization’s founders.
When you price other cryptocurrencies in relation to bitcoin, you start to paint of picture of what’s actually going on. When priced in bitcoin, nearly zero other crypto projects have appreciated in value over time. Bitcoin solves a real economic problem of storing purchasing power/value over time through a decentralized platform. Most other cryptos can be thought of as companies that are trying to make a profit. This is not to say that some of them may not be desired or produce gains in terms of dollars.
I would tread very carefully when thinking about investing in alternative crypto projects. This is the way I look at the market - there is Bitcoin, and there is everything else.
If you want further reading on why another project is unlikely to replace Bitcoin, I highly recommend you check out this article comparing the number zero and bitcoin (I know it is a long one, but it is well worth the time if you want a deep dive).
I can’t afford a whole bitcoin, it’s too expensive!
Every bitcoin is divisible into 100 million units called satoshis, named after creator Satoshi Nakamoto. You do not have to buy a whole coin. As an example, today (as of this writing), you can buy 1 million satoshis for right around $400.
Okay, this bitcoin thing sounds interesting. How do I buy some?
The easiest way to acquire bitcoin is by exchanging your dollars for bitcoin on an exchange. Exchanges provide a market on the internet for people looking to buy or sell cryptocurrencies. Some of the most popular ones are Coinbase, Cash App, and Kraken. The exchange you use is up to you, and will depend on your preferences and the device you use (smart phone/computer).
Buying bitcoin on an exchange is as simple as creating an account, entering financial/payment information, and placing an order to buy. This is a very safe process if you use well-known exchanges - it’s just like buying any other product over the internet.
Bitcoin is a peer-to-peer network, so besides using an exchange, you can receive bitcoins directly from any other person in the world if they would like to send them to you.
HA! Bitcoin? Isn’t that just used by criminals?
The answer to this is a resounding “NO”.
If a criminal were to desire to engage in shady activity, they would be better off using dollars instead of bitcoin. Every transaction on the bitcoin blockchain is public information, accessible to anyone at any time.
There is a remarkably greater amount of illicit activity that occurs using the traditional financial system than there is with bitcoin. Read this article for a deeper look into this topic.
Bitcoin is for everyone, everywhere, all the time.