Bitcoin and Blockchain: Five basic facts

Summary:

Bitcoin and cryptocurrencies are among the most revolutionary trends in the financial world right now, but to the general public, they’re still somewhat of a mystery. While its decade-long development has seen fits and starts, “crypto” has taken a toehold on the market—even in areas where everyday consumers might begin to see its use and effects.

From WGN Radio interview with Sam Jacobsen

“Bitcoin was really created with the vision of being a completely decentralized payment system,” says Associated Bank Senior Equity Research Analyst Sam Jacobsen. “In fact, the original whitepaper back in 2009 is literally called ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ and talks about a purely peer-to-peer version of payments without going through any financial institutions. That was quite literally the whole point of Bitcoin.”

Today, the number of crypto wallet users (those who own a cache of cryptocurrency) has risen to over 70 million—with Bitcoin boasting more than 13 million active holders.

So what should you know about the workings of Bitcoin and cryptocurrency?

Here are five basic facts to get you started:
1. It’s borderless. Most currency is backed by government entities. The U.S. dollar, for example, is backed by the Federal Reserve Bank of the United States. The Euro is backed by the European Central Bank. If you want to use these currencies in different countries, you need to have them converted. Bitcoin, on the other hand, is “digital money.” Transactions are recorded in a technology called blockchain, a kind of digital ledger which shows the transaction history for each unit and is used to prove ownership.
2. It’s made of data, rather than gold or silver. While there are some “souvenir” coins that represent cryptocurrency—such as ones depicting Dogecoin’s beloved Shiba Inu—the currency is all digital.
3. Yes, you can buy things with it. Bitcoin is built for a digital world. In 2014, online retailer Overstock was one of the first to embrace it, and Tesla is now accepting it as payment for their vehicles. Amazon, PayPal, Mastercard and others are also working with third-party companies to process cryptocurrency payments. But it’s not as simple as pulling out a credit card. PayPal converts Bitcoin into the local “fiat” currency to pay for purchases. In other instances, added transaction costs can run 12-13% of your overall purchase price. And, because “buying” with cryptocurrency is akin to selling it—like a stock—you may face capital gains taxes. Plus, cryptocurrency’s value and security can fluctuate wildly. This is why most retailers are cautious about wholeheartedly accepting it as a standard payment method until the technology to process it has been more standardized, faster and refined.
4. There are many types of cryptocurrency beyond Bitcoin. In fact, there are thousands. In addition to Bitcoin and Dogecoin, there’s Ethereum, Litecoin, Ripple, NEO, IOTA … and the list keeps growing. They vary in architecture, developers and uses, but they are still all digitally based. But, as you might expect from an unregulated, newly developed asset class, not all cyber coins are what they seem. According to the running list on 99Bitcoins.com, more than 1,600 digital currencies are now considered “deceased”—and worthless.
5. You can’t get it through your bank—yet. Currently, there are three ways to get bitcoins. You can buy them on an exchange such as Robinhood, Coinbase or eToro. You can accept them as payment for goods and services. And, if you have the right combination of know-how and computer hardware, you can “mine” new ones. Although some financial institutions are considering offering cryptocurrency services to customers (which really goes against its original premise), it’s still a risk that many are unwilling to take.

Here are five basic facts to get you started:

1. It’s borderless.

Most currency is backed by government entities. The U.S. dollar, for example, is backed by the Federal Reserve Bank of the United States. The Euro is backed by the European Central Bank. If you want to use these currencies in different countries, you need to have them converted.

Bitcoin, on the other hand, is “digital money.” Transactions are recorded in a technology called blockchain, a kind of digital ledger which shows the transaction history for each unit and is used to prove ownership.

2. It’s made of data, rather than gold or silver.

While there are some “souvenir” coins that represent cryptocurrency—such as ones depicting Dogecoin’s beloved Shiba Inu—the currency is all digital.

3. Yes, you can buy things with it.

Bitcoin is built for a digital world. In 2014, online retailer Overstock was one of the first to embrace it, and Tesla is now accepting it as payment for their vehicles. Amazon, PayPal, Mastercard and others are also working with third-party companies to process cryptocurrency payments.

But it’s not as simple as pulling out a credit card. PayPal converts Bitcoin into the local “fiat” currency to pay for purchases. In other instances, added transaction costs can run 12-13% of your overall purchase price. And, because “buying” with cryptocurrency is akin to selling it—like a stock—you may face capital gains taxes.

Plus, cryptocurrency’s value and security can fluctuate wildly. This is why most retailers are cautious about wholeheartedly accepting it as a standard payment method until the technology to process it has been more standardized, faster and refined.

4. There are many types of cryptocurrency beyond Bitcoin.

In fact, there are thousands. In addition to Bitcoin and Dogecoin, there’s Ethereum, Litecoin, Ripple, NEO, IOTA … and the list keeps growing. They vary in architecture, developers and uses, but they are still all digitally based.

But, as you might expect from an unregulated, newly developed asset class, not all cyber coins are what they seem. According to the running list on 99Bitcoins.com, more than 1,600 digital currencies are now considered “deceased”—and worthless.

5. You can’t get it through your bank—yet.

Currently, there are three ways to get bitcoins. You can buy them on an exchange such as Robinhood, Coinbase or eToro. You can accept them as payment for goods and services. And, if you have the right combination of know-how and computer hardware, you can “mine” new ones.

Although some financial institutions are considering offering cryptocurrency services to customers (which really goes against its original premise), it’s still a risk that many are unwilling to take.

Cybercurrency represents a quickly changing—and often controversial—way that money is handled. “Technologies do evolve over time,” continues Jacobsen, “but I think of how much of the mainstreaming that we’re seeing is perhaps opportunism, versus an actual evolution of what cryptocurrency is or could become. It really remains to be seen.”

Below are two resources for further reading and deeper understanding of this evolving financial technology.

How to Buy Bitcoin

What Can You Buy With Bitcoin? - The New York Times