Synopsis: There is so much to learn about Bitcoin. The same questions crop up again and again from newcomers, so here is a handy Bitcoin FAQ to provide meaningful answers to some of the toughest questions that get asked of Bitcoin – the new form of alternative money.
Bitcoin FAQ – The Frequently Asked Questions of Bitcoin
The arrival of something as revolutionary as Bitcoin can be difficult to comprehend at first. There is so much to learn, and when getting started, it can be like drinking from a fire-hose. The same questions crop up again and again from newcomers, so here is a handy Bitcoin FAQ to provide meaningful answers to some of the toughest questions that get asked of Bitcoin.
1. What’s Wrong With Ordinary Money?
The money that most of us are used to is government issued currency – that is, dollars, euros, pounds, etc. One of the most poignant Bitcoin criticism points comes from those who accuse Bitcoin as being a solution looking for a problem. For the most part, government-issued money seems to fulfill the purpose it was created for fairly well. Everyone agrees on the value of a dollar, and we know that if we are paid a dollar, others will be happy to accept it when it comes time for us to want to spend it.
Some of the biggest problems with government-issued money are only obvious in a major financial crisis. In times of trouble (such as when a government gets into too much debt), governments retain control of the money printing presses. The resulting hyperinflation devalues the savings of everyone else (as was the case in Germany, Argentina, Zimbabwe and Russia at various points throughout the 20th century). Bitcoin has a finite supply, and thus Bitcoin holdings cannot be inflated away to nothing.
The fact that financial middlemen are so intertwined within our money system also represents an invisible tax that we are all paying, all of the time. When something is paid for by credit card, a few percentage points goes to banks, credit card companies, payments processors, etc. This value siphoned off manifests itself in higher prices for everything, and a drain on more productive areas of the economy.
This Bitcoin FAQ should also briefly mention some of Bitcoin’s other advantages – particularly privacy, speed (for international payments), and universal access. Some of these advantages aren’t important to everyone, but they are vital to certain audiences.
2. Is Bitcoin Secure?
Yes, Bitcoin itself is very secure. All of the code in the Bitcoin protocol has been open source since the very beginning, meaning that the code can be inspected by anyone with an interest in it. It also means that this code has been open to hackers for many years. While exposing code to hackers may sound like a bad thing, in actuality it strengthens, rather than weakens, the security of the system.
It’s like the difference between a child who is placed in a germ-free household, versus one who eats dirt and plays with bugs. The kid raised in the sterile environs will be weaker if anything does make it past his artificial bubble, while the one who was constantly exposed to germs becomes stronger for his exposure. With billions of dollars at stake, Bitcoin has had many hackers try to breach its defensive dykes, but none have succeeded. It uses best-practice cryptography and a decentralized network. The Bitcoin network is far more secure than any bank database.
Whenever you hear of a cryptocurrency hack, invariably it refers to a crypto exchange being breached – not the Bitcoin protocol itself. Crypto exchanges, which are used to buy and sell are far more fragile
3. Why Is The Price So Volatile?
Ah, the price – it’s always a topic of conversation and it would be remiss if this Bitcoin FAQ didn’t cover it.
The price of Bitcoin (measured in government-issued money, such as US dollars) fluctuates quite a bit. The gyrations of the Bitcoin market make people nervous, particularly those who are risk adverse. The thing to remember is that the price of Bitcoin (just like any asset) consists of both intrinsic value and speculative value. Bitcoin has attracted speculators who care little for Bitcoin’s utility – they are more interested in betting that it will continue to increase in price.
Whenever Bitcoin has a major price increase, it’s usually due to new speculation. Conversely, a crypto crash is usually fueled by speculators fleeing in a self-reinforcing feedback loop. Though it is difficult, it is best to try to ignore the price. Instead, look at the underlying technology of Bitcoin, and the intrinsic value that it is bringing – just like a company is more complicated than its stock price.
4. How Does Bitcoin Mining Work?
Cryptocurrency mining is rather too complicated for this Bitcoin FAQ to quickly explain, but essentially it involves dedicating computer power to the maintenance of the network. Bitcoin mining sees computers all over the world competing to be the first one to “win” a difficult game of chance. The more processor power that a computer is able to direct to this task, the greater the chance of winning.
Having a more powerful computer is thus a bit like having more tickets in a lottery. the one with the most lotto tickets isn’t assured of winning, but they have a better chance than someone with fewer tickets.
The winner (decided roughly every 10 minutes), is then rewarded with newly-issued Bitcoin, and gets the privilege of inscribing the transactions that took place across the whole network into the permanent record, which is known as the “blockchain”.
5. Is Bitcoin A Scam?
Some people, frankly, find it all a bit hard to believe. They wonder aloud if Bitcoin hasn’t just been dreamed up as another way to fleece people out of their hard-earned money. Bitcoin has even been accused of being a “Ponzi Scheme” – a charge which reveals a complete lack of understanding of both Bitcoin and Ponzi schemes! Ponzi schemes show positive returns by paying old investors with the money gained from new investors. There is nothing analogous to that when it comes to Bitcoin – everything dollar that comes into Bitcoin is voluntary.
The critical thing that this Bitcoin FAQ needs to impress upon you is that money can be whatever people say it is. If Bitcoin is a scam, then so government-issued money is a far greater scam. Look at the features of Bitcoin – finite supply, decentralized governance, privacy, etc. Then realize that government-issued money has none of these things going for it, and you’ll start to see what all the Bitcoin believers already do – that Bitcoin represents a new and better form of money.
6. How Is Bitcoin Different From Other Cryptocurrencies?
Argument rages over which is the best cryptocurrency, and there are no easy answers. It’s like asking whether gold is “better” than iron or platinum. Each of these metals have different specialties, and so too is the case with Bitcoin vs the other crypto assets.
Bitcoin’s primary utility is as an alternative currency, and in particular as a store of value. Other cryptos (such as Bitcoin Cash and Litecoin) are less adept as stores of value, but are better at handling small transactions. Still others, like Ethereum, were not primarily designed to be currencies at all.
The other thing that this Bitcoin FAQ must point out is that Bitcoin has has a very large community – that is, the number of developers, users and the hardware network. Bitcoin was the first and is currently the largest cryptocurrency – a fact which is very helpful in helping it to remain supported.
7. How Can I Get My Hands On Bitcoin?
There are three way to gain Bitcoin:
- Buy it through a cryptocurrency exchange, such as Coinbase or CEX.io.
- Mine it, using mining hardware to contribute to the maintenance of the network.
- Accept it as payment from others, in exchange for goods and services.
Whichever method you decide to use, you will need a cryptocurrency wallet to store your holdings (think of this as being roughly analogous to a bank account).
8. How Can I Find Out More?
- Join the cryptocurrency community. By attending a Meetup or a conference, you can meet people who will directly help you and your efforts to educate yourself.
- Sign up to my email list, to be informed of what’s going on in the world of crypto.
- Read the best cryptocurrency books. They will help you gain an even more in-depth understanding than was possible to provide in this Bitcoin FAQ.