Bitcoin is mentioned on the news every day.  You can’t miss it.  You may have also heard of blockchain and bitcoin mining.  We’re going to explain what they are so you can decide if it’s the currency of the future or a bust about to happen.

Bitcoin

Bitcoin is a type of digital currency called a cryptocurrency.  There is no physical coin or bill for this currency as it is entirely digital.  It is called a cryptocurrency because of the use of cryptography in verifying transactions.  Bitcoin was the first cryptocurrency and the name is often used to refer to all cryptocurrencies, just like all kinds of soda are called Cokes.  Bitcoin was introduced by Satoshi Nakamoto in this white paper.  It gets technical at times, but it’s not too bad and it’s definitely worth reading if you’re interested in Bitcoin and cryptocurrencies.

Here’s a list of the top ten cryptocurrencies:  Bitcoin, Ethereum, Ripple, Bitcoin Cash, Cardano, NEO, Stellar Lumens, Litecoin, EOS, IOTA.

Cryptocurrencies like Bitcoin are decentralized and do not need a central bank for processing transactions.  It uses a distributed digital ledger that to record and verify transactions.  The distributed ledger is spread across many computers, which we call nodes in this context.

Blockchain

A blockchain is a technology behind the digital ledger.  Each record in the blockchain is known as a block.  Each block is made up of many individual transactions and is linked, or chained, to other blocks.  Before a new block is added, a number of things are verified to make sure that the transactions are valid, such as the amount being available and not spent before.

Because of the way blocks are linked, it’s extremely difficult to change a block since each of the following blocks would also need to be modified.  After a block is added, it is sent to the other nodes on the network.  Through cryptography, the blocks are verified.  Each node has a copy of the blockchain, so modifying the blockchain would need every node to make the same change.  This makes a blockchain very secure and difficult to change.

It’s important to note that a blockchain has uses outside of cryptocurrencies and finance.  Companies are already incorporating it into their supply chain to verify that every step is ethical.  L.L. Bean wants to use it, along with some sensors, to learn how people use their clothes.

Bitcoin Mining

The cryptography used in the blockchain requires a lot of processing power.  Instead of a central clearinghouse doing all the processing, the work is distributed to other nodes on the network.  These nodes make the necessary computations and receive a payment in that cryptocurrency for the work.  That’s called mining.

While there are commercial bitcoin mining operations, anyone with the right equipment can get involved.  Early miners were able to use their computers for mining.  The process has evolved from that into building machines with high-end graphics cards and then into multiple high-end graphics cards.  The current evolution now uses a special purpose chip called an ASIC (application-specific integrated circuit).

Technically you could try mining on any computer, but the profit from mining will be offset by the electricity cost to run the computer.  Without a purposely built mining machine, you will likely pay more for electricity than you make in bitcoin.  If you’re interested in learning more about mining, let us know in the comments.

What’s in store for the future?

The volatility of the cryptocurrency market along with its current high value has a lot of people paying attention.  Where this will go in the future is anyone’s guess at this point.  The value of a bitcoin is high now so mining is profitable for many.  The more miners, the more secure the system.  Remember that each node, or miner, has a copy of the ledger, or blockchain.

As more blocks are added to the blockchain, the calculations necessary become more complex.  This lowers the reward for mining since it takes more electricity to solve the calculations.  The value of bitcoin is high, so that doesn’t matter now.  If the bitcoin value drops, then it might not be profitable for most current miners to continue.

For the blockchain to work there needs to be more good nodes than bad nodes.  Its design creates a greater incentive to cooperate and mine coins than to try to steal.  If that balance changes then it’s very bad for the security of the blockchain and Bitcoin.

Blockchain, on the other hand, will continue to find its way into other uses.  It’s definitely here to stay.