What everyone wants to know about cryptocurrency

This entry is part 2 of 8 in the series Cryptocurrency Basics

Why are they such a big deal?

Cryptocurrencies have succeeded in answering two of the fundamental problems with moving money online:

  • How do I stop we stop someone spending the same money twice?
  • How do we avoid middle men?

If it gets established, we’ll all benefit from a faster, more secure way to shop online.

There are also social benefits. The micropayments, microloans and very low transaction fees all help poorer countries access online services.

But aren’t they just for buying drugs?

Yes, they were for a while.

The early adopters of bitcoin were the ones with the biggest incentitive to use it. Among these people were lawbreakers who saw it as a way of moving money around anonymously.

That use is becoming far less prevalent. Now a majority of users of bitcoin hold on to them (about 85% at time of writing.) Many use them for tips and online games. Some use them for purchases.

How Can I prove I Own a Bitcoin?

The public ledger proves ownership.

But how do we know that an entry on the ledger is legitimate?

Where the islanders knew everyone by sight bitcoin relies on digital signatures.

These use the same cryptography that protects websites. It’s designed to prove you are who you say you are, and relies of two passwords, one made public, one kept hidden. If you want to learn more here’s a description of how they work.

An entry on the ledger is legitimate only if it is digitally signed by the owner.

How Do I Spend Bitcoins?

You spend bitcoins by ‘signing’ a transaction and putting it in the ledger. You use a piece of software called a wallet to do this.

It takes about 30 minutes for the transaction to go through.

Can I spend less than a whole bitcoin?

Yes, you can combine and split bitcoins as you see fit. This works just like splitting notes into coins, and back again.

You can do this down to smallest unit, called a satoshi, which is 1/100,000,000 of a bitcoin.

Are Bitcoins Secure?

Yes, pretty much. At the individual level, it’s as secure as any bank website. Keep your password safe and your cryptocurrency is safe.

If you’d like to know more about why I said ‘pretty much’, and not ‘yes!’, read about the large scale vulnerabilities here.

Is Bitcoin stable as a currency?

No, not at all. The price goes up and down, is prone to bubbles and the odd crash of an online exchange. Bitcoin isn’t yet a serious investment.

Can Bitcoins be used anonymously?

No, they can’t. It’s a public network, and any public network is prone to analysis by anyone. If you know how, you can work out real-world identities from it. It’s just not particularly easy to do so.

And that’s it. That’s all you need to know to use bitcoins. For more detail on any of these topics, please read on.

 

 

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