If you haven’t heard of Bitcoin by now, you haven’t been paying attention. In 2017, the price catapulted from less than $1000 to more than $20,000 per Bitcoin. As of March 2018, the price has stabilized somewhat. It’s currently hovering at around $11,000. Bitcoin is of particular interest because of its capability to serve as an online currency, almost like digital cash.
What Is Bitcoin?
A Bitcoin is a digital voucher that can be sent from one user to another across the Bitcoin network, which is a group of computers distributed across the world and controlled by no central authority. The smallest unit of a Bitcoin is called a Satoshi. One Satoshi is only 0.00000001 Bitcoins.
Bitcoin works through a public ledger stored in the blockchain maintained by computers on the Bitcoin network. Each computer on the network has its own copy of the ledger. Other cryptocurrencies work similarly, but each has subtle and sometimes large differences in how it uses blockchain and the public ledger. To understand how blockchain really works, it helps to understand a few key concepts:
- Public Ledger – Every transaction ever made using Bitcoin (or other cryptocurrencies) is stored on a public ledger, called the blockchain. The system uses cryptographic techniques to verify access to the wallets of those who enter transactions. When new transactions are entered, the wallet that initiates the transaction is checked to ensure that it contains sufficient Bitcoins to make the transaction by computers all over the Bitcoin network. The ledger itself is referred to as the blockchain.
- Bitcoin Transaction – A transaction is a transfer of Bitcoins between two digital wallets. When a transaction is made, it is submitted to the public ledger. Individuals initiating transactions use cryptographic signatures to show that own the wallet. On the Bitcoin network, confirming the signature can take a while; only Bitcoin miners can enter a transaction into the blockchain, and they must mine to solve the cryptographic puzzles necessary for entering the transaction. Each transaction carries a small amount of Bitcoin that is given to the miner.
- Mining – Bitcoin mining is the process by which new blocks are confirmed and entered into the blockchain. Mining is designed to be hard and resource-intensive, with the difficulty increasing over time. The first Bitcoin miner to solve the problem is awarded Bitcoins by the network according to a fixed schedule that gradually decreases the reward for mining. The Bitcoin miner can then set an address for receiving fees from transactions entered into the block.
- Consensus – To verify transactions in any blockchain requires the consensus or at least the majority vote of the computers in the transaction network. In a proof-of-work system like Bitcoin, consensus can be used to verify proof of work and transaction. On the Ripple network, a consensus is used to maintain account balances and to verify transactions without proof-of-work.
- Proof of Work – A proof of work is a piece of information demonstrating that the bearer has completed a difficult task. In modern usage, it usually represents computer time required to solve a cryptographic problem.
In addition, to Bitcoin, many other cryptocurrencies have been created, and new ones are announced every week. Not all are well-known. Some of the most popular include, in addition to Bitcoin, Ethereum, Ripple, Bitcoin Cash, Litecoin, Neo, Cardano, and Stellar. Each uses blockchain technology and consensus, but there are subtle and sometimes very large differences in how they function:
- Bitcoin – The first cryptocurrency and the best known. Requires Proof of Work for creating new Bitcoins.
- Ethereum – A more recent effort supported by major IT vendors. Supports Smart Contract technology through a virtual machine running on computers distributed through the Ethereum network.
- Ripple – Supported by financial institutions, it does not use Proof of Work but instead represents commodities in Ripple transactions, with the cryptocurrency XRP serving as a base commodity.
- Bitcoin Cash – An offshoot of Bitcoin designed to allow faster transactions.
- Litecoin – Similar to Bitcoin with blocks created periodically at a network-defined rate.
- Neo – Has many features such as partial network consensus and smart contracts.
- Cardano – A new smart contract platform.
- Stellar – A new payments network similar to Ripple.
- Monero – A unique cryptocurrency with features designed to prevent ASIC mining and permit strong anonymity.
Trading Cryptocurrencies for Goods and Services
Cryptocurrencies have gone through some wild leaps and starts over their history, with vendors sometimes accepting cryptocurrencies in greater numbers and sometimes changing policies to refuse them. Currently, Cryptocurrency acceptance is on the upswing.
Vendors can easily accept Bitcoin through payment gateways. Integrations and plugins are available for popular e-commerce platforms such as Shopify and Magento. Some payment gateways support other cryptocurrencies. Depending on what plugins and software are available for the cryptocurrency you want to accept, a higher level of sophistication may be required.
For Ripple, a developer API is available. Accepting Ripple is more complex than accepting most tokens, but interfacing with the Ripple network allows you to transparently accept any form of currency, as well as gold and other commodities in the form of payment that you choose. Special gateways on the Ripple network allow exchanging between a fixed bags of commodities, with the base currency XRP used for transfers when necessary.
Over time, it will become easier to accept cryptocurrencies as new software is developed. If volatility and transaction fees stay low, cryptocurrency payments will become more popular.
How to Get Started with Cryptocurrencies
If you are interested in getting involved with Bitcoin or other cryptocurrencies, you can register an account at Coinbase or another trusted crypto exchange and buy Bitcoins directly from your bank account. With the Coinbase Shift card, you can buy almost any goods or services with Bitcoin as though you were paying with a credit card.
While the day-to-day changes in cryptocurrency prices can be hard to predict, one thing is certain: Cryptocurrencies are here to stay. They aren’t going to replace banks overnight, but interest in using cryptocurrencies to place purchases is growing. If you sell goods or services online, you are well advised to look into how you can accept Bitcoin and other cryptocurrencies on your own website.