Bitcoin cheat sheet: Everything professionals need to know
If you’re curious about the original decentralized cryptocurrency, here’s what you need to know about Bitcoin, including why the price of a bitcoin keeps climbing.
You’ve probably heard of Bitcoin—it’s a digital currency that doesn’t need a central bank, functions internationally and keeps gaining value. Everyone wants a piece, but not everyone understands what it is.
Bitcoins are valuable, at least right now. There are a lot of guesses as to what’s driving bitcoin prices sky-high, and whether those prices will last before crashing back down again.
Is it worth investing in bitcoins? What are the security risks of using Bitcoin? And just what is the blockchain? The answers to all of these questions and more are in this Bitcoin cheat sheet. (Note: It’s Bitcoin when referring to the concept or network, and bitcoin when referring to “a unit of account.”)
What is Bitcoin?
Bitcoin (BTC) is the original decentralized cryptocurrency, a digital form of currency that uses blockchain and cryptography to validate itself. Prior to Bitcoin’s inception, other forms of digital currency and even cryptocurrency, existed, but Bitcoin was the first to decentralize the proof-of-work required to validate the coin’s legitimacy.
Centralized cryptocurrency is controlled by a single source, which means that source has complete control over its legitimacy, value and other properties. Decentralization, by contrast, gives bitcoin value independent of a controlling agency like a government or a corporation. The value of a single bitcoin is instead determined solely by supply, demand and what people are willing to pay to own a fraction of one.
Bitcoin uses blockchain technology to independently verify the legitimacy of a bitcoin. Each transaction on a Bitcoin blockchain is unalterable, making it a total public record of each use of the coin (or portions thereof).
The public nature of the blockchain makes it ideal for use as a currency verification system, as there’s no need to have a trust relationship with the other party: Proof of the legitimacy of the currency is inherent in its hash.
SEE: IT leader’s guide to the blockchain (TechRepublic Premium)
Bitcoin was developed by a programmer or a group of programmers going by the name Satoshi Nakamoto. A paper published by Nakamoto in 2008 described the concept of the blockchain and Nakamoto’s intended purpose for it: The basis of a peer-to-peer technology cash system called Bitcoin.
2009 marked the first availability of Bitcoin and its initial value of, essentially, nothing. By 2010 not much had changed—one bitcoin owner tried auctioning 10,000 BTC for $50 but had no buyers.
That’s a far cry from the current value that fluctuates in the neighborhood of $50,000. By 2018, the value of a single bitcoin hit $10,000, and it stayed there, plus or minus a few thousand dollars, until late 2020. Beginning in October 2020, the price of bitcoin started to skyrocket to an ultimate high of more than $60,000 on April 13, 2021. That high triggered a massive selloff, which has in turn caused the price to drop by roughly $15,000 as of late April 2021.
How is Bitcoin different from other cryptocurrencies?`
Bitcoin is the first decentralized form of cryptocurrency, but it’s certainly not the only one. A large number of blockchain-based cryptocurrencies have emerged since 2009, which raises the obvious question: How is Bitcoin different?
Aside from its much greater value, there are several things that make Bitcoin different from cryptocurrencies such as Etherium, Dogecoin, Litecoin and others. All of these cryptocurrencies use blockchain technology, but the method and purpose of each one is different.
Etherium, one of the most talked about bitcoin alternatives, isn’t actually designed to be a value transfer platform; instead, it was built for distributed application programming. Etherium does have a monetary value in the form of its fuel, called Ether, but that’s just one part of its overall model. That hasn’t stopped it from being traded like a currency, though, and it has followed similar trajectories to Bitcoin, with a spike in value in late 2020. Ethereum has also become the de facto home of non-fungible tokens, or NFTs, which are blockchain ledger entries certifying ownership of a digital asset, like the first-ever Twitter Tweet, a meme or other non-physical item.
SEE: Blockchain is promising, but it can’t save the world (TechRepublic)
Other cryptocurrencies, like Litecoin, Dogecoin and Einsteinium, use blockchains but don’t rely on SHA-256 encryption like Bitcoin does; they use Scrypt, a password-based key derivation function, to build coin hashes instead.
Bitcoin’s biggest difference from its competitors isn’t any of those code-related elements, though—it’s its sheer popularity and name recognition. Because it’s so well-known, Bitcoin is more heavily invested in by big players (e.g., governments). This has driven its price sky-high and made Bitcoin a household name.
Why are Bitcoin prices so high?
As covered by TechRepublic previously, the amazing rise in Bitcoin prices is largely speculative. Analysts I’ve spoken to nearly unanimously agree that the Bitcoin price surge is based on nothing but speculation and that, without any historic precedent to fall back on, it’s anyone’s guess how high Bitcoin will go before crashing, if it does at all.
Governments have been investing in Bitcoin, which is one reason prices keep climbing. The Chinese government has put its force behind Bitcoin mining in the country, which has prompted other countries to start stepping up their investments to avoid Chinese Bitcoin domination.
Bitcoin mining is the act of adding new transactions to the blockchain, which is done by solving complex mathematical problems. Solving a problem adds a transaction to the ledger, and more bitcoins are issued as the ledger grows.
As of April 2021, bitcoin has hit a new high more than $60,000 per coin, leading analysts to speculate that there’s a correction looming, an impending crash, or other record value loss due to massive selloffs in the wake of its $60K high.
Despite being more popular than ever, the Bitcoin world is still full of unknowns.
What are the practical uses for Bitcoin?
Practical use for Bitcoin and other cryptocurrencies has long been one of the major sources of criticism they’ve met with—it’s difficult to turn bitcoin into cash, which makes using it for purchases tough.
Businesses can still invest in Bitcoin and hope for a return, and there are a growing number of places it can be used to make purchases, including big-name businesses like Tesla. Buying things with Bitcoin can be tricky, though, especially since items aren’t often priced in BTC, which makes the value of the bitcoin itself irrelevant since it’s the cash value being used.
Digital economics researcher Owen Rogers specifically warns against pricing items in bitcoin due to its volatility—an item priced at 1 BTC today might result in a huge loss if bitcoins drop in price the way they have in the recent past. During the week of December 18, 2017, for example, bitcoins tumbled nearly 30% in value, and in April 2021 news of a new capital gains tax in the United States caused massive selloffs that threatened Bitcoin’s four-month, 66% growth, wiping over $200 billion in value from the crypto market in less than a week.
There are a lot of practical business uses for the blockchain technology that powers Bitcoin that don’t involve monetary valuation, which is perhaps the bigger takeaway from Bitcoin. Businesses can use blockchain to enhance security, build decentralized applications, make data redundancy simpler—it’s nearly impossible to list all the various uses, and more are being created all the time.
What are the security risks of using Bitcoin?
To find the crime, follow the money, and Bitcoin is definitely on the cutting edge of security risks. There have been a number of high-profile thefts of bitcoins, and apps that focus on cryptocurrency are often loaded with malware.
SEE: Ransomware threats to watch for in 2021 include crimeware-as-a-service (TechRepublic)
Bitcoin is anonymous, just like cash, which makes using it tempting for cybercriminals. Amassing bitcoins is necessary to use it, and rather than earn it by mining or exchanging fiat currency (declared by a government to be legal tender) for it, cybercriminals are more apt to try stealing yours. In the spring of 2020 alone, cybercriminals made off with $1.4 billion in cryptocurrency, and Bitcoin remains the preferred currency. There’s good reason for cybercriminals to prefer Bitcoin, too: $500 in bitcoin stolen on April 23, 2020, would be worth more than $3,000 as of April 23, 2021. That’s a return of nearly 600%.
Being secure with your bitcoins means keeping a close eye on your digital wallet, only using trustworthy Bitcoin-related apps and websites, and being aware of the latest security trends in the Bitcoin world. It’s impossible to completely mitigate all risks, but being smart and proactive, as with any form of cybersecurity, can save you a lot of headaches.
Should I invest in Bitcoin?
Businesses and individuals investing in Bitcoin are in for a wild ride, so don’t invest if you are averse to risk.
It doesn’t take much for the price of Bitcoin to tumble, as evidenced by prices the week of April 19, 2021, which dropped by 21% from its high of over $60,000 on April 13, less than a week prior. Bitcoin’s sudden loss has been attributed to potential new US tax laws that would raise capital gains tax. The announcement also caused stock indexes to drop along with the value of other major cryptocurrencies traded on Coinbase.
On a larger scale, Bitcoin’s growth from early 2020 to today has been monumental, but rocky. A bitcoin investment at the beginning of the pandemic would have paid huge dividends by now, but its continuing value is in no way guaranteed. “Bitcoin … has no intrinsic value; it never did and never will. It is a purely speculative asset—a private fiat currency—whose value is whatever the markets say it is,” economist Willem H. Buiter said on MarketWatch. Take that as a warning to potential Bitcoin or cryptocurrency investors in general: It’s not a sure thing, and it may have already hit a peak.
“Deeply irrational market gyrations like the one that drove GameStop’s share price to unprecedented highs in January (followed by a significant correction) should serve as a reminder that, lacking any obvious fundamental value anchor, bitcoin is likely to remain a textbook example of excess volatility,” Buiter said.
Take that as a warning to potential Bitcoin or cryptocurrency investors in general: It’s not a sure thing, and each peak could be the last before it slides into irrecoverable loss territory.
Those doing business internationally, however, may want to give Bitcoin a second thought. As American Express points out, Bitcoin has a relatively quick transaction time, so volatility won’t necessarily be an issue; accounts are international, so there’s no need to keep multiple portfolios of currency; and there’s no credit risk since the sender has to have the bitcoin in her wallet to make a purchase.
Bitcoin isn’t a flawless international payment system. Numerous countries have banned Bitcoin and other forms of cryptocurrency, and exchanging Bitcoins to local currency can take time, at which point volatility can cause an extreme change in value, which can affect the sender and the recipient.
There’s a lot of potential in Bitcoin, but that doesn’t mean you should rush out and invest in the digital currency, though: Wait for some cryptocurrency market stabilization or a practical use to emerge before committing company money that could disappear overnight. It’s also worth seeking advice from a professional financial consultant before investing large amounts of money in bitcoin, or anywhere else for that matter.
Is investing in Bitcoin environmentally responsible?
We live in an age where it’s important to consider the environmental cost of everything we do, and some green habits have hidden downsides that can make one question their value. Not so with Bitcoin: It’s environmental downsides are well-recorded and have been known for several years.
As the Bitcoin network continues to grow, more and more mining is necessary to extract value. Revenue for miners keeps pace, though, which incentivizes more miners to get involved in order to gain a slice of the Bitcoin pie that’s doled out when a coin is successfully mined. What that means is that the bigger the Bitcoin network grows, the more energy is used to mine coins.
Digiconomist has one of the best visualizations of Bitcoin’s energy consumption, and what it reveals is a stark picture of Bitcoin’s true cost. Over the course of one year, for example, the Bitcoin network has a carbon footprint comparable to the country of Bulgaria (49.57Mt of CO²), uses as much energy as Kazakhstan (104.37TWh), and is responsible for as much electronic waste as Luxembourg (9.60kt).
If that’s hard to conceive of, the footprint of a single bitcoin transaction is put in slightly more relatable terms: One transaction has a carbon footprint of 484.55 kg of CO², equivalent to 1,073,927 VISA transactions, or 80,758 hours of videos streamed on Youtube. That single transaction uses enough electricity (1020.1kWh) to power the average U.S. home for nearly 35 days, and generates electronic waste equivalent to the mass of one and a half C-sized batteries.
Other cryptocurrencies aren’t exempt from this calculation, either: Ethereum uses a massive amount of energy as well. Combined with the smaller expenditures of altcoins, and the cryptocurrency world becomes a huge environmental risk that is hard to excuse.
It is true that Bitcoin is slowly starting to use more green energy, with 76% of miners using renewable energy, and 39% of the total energy consumed by cryptocurrencies relying on proof-of-work coming from renewable sources.
Unfortunately, countries in the APAC region, like mining leader China, use the least amount of green energy for Bitcoin mining while contributing nearly 77% of the mining power in the world. As energy costs associated with Bitcoin mining continue to increase as more coins are mined there will be more incentive to quickly deploy mining rigs, which could easily lead to systems being deployed that consume non-sustainable energy.
It will be increasingly difficult to justify Bitcoin’s impact on the environment unless something radically changes; as of now, as Quartz’ Tim McDonnel said, Bitcoin mining operations “are designed to reward energy waste.”
How do I get started with Bitcoin?
Bitcoin is confusing, and getting started can be daunting if you don’t know who to trust or where to begin. What do you need? How do you buy bitcoins? Where is it safe to store them?
There are several different options for a Bitcoin setup, and the biggest decision to make is what kind of digital wallet to use to store your coins. Some wallets are hosted online, others are mobile apps, and you can even set up a wallet to be completely local on your machine.
One of the easiest platforms for beginners is Coinbase, where you can buy, sell and store bitcoin. Coinbase eliminates a lot of the manual setup and hassle from the Bitcoin process.
Once you’re ready to move on to a more advanced mode of operating, or if you plan to hold on to your bitcoin for a long time without doing any cryptocurrency trading, it’s a good idea to put it into a separate wallet app. There are a variety to choose from, and using one means the bitcoins you have are yours alone—if you leave them online with Coinbase or another hosted wallet, your bitcoin is never in your hands directly. Long-term investors and serious bitcoin users should plan to go this route eventually.
Editor’s note: This article has been updated to reflect the latest information.