For so many of us, the COVID-19 pandemic has brought us closer to family. I’m spending more time with my parents, having quiet dinners at home, and discussing the state of the world. And so, it was a matter of time before my parents would ask why I spend so many hours writing and talking about “this Bitcoin thing.”
Fielding various questions about how it was made and who it was ‘backed by,’ I realized that these questions were not unique. These are questions every beginner, boomer or millennial, asks when learning about Bitcoin for the first time.
And so, I sat down to create FAQ as a way to make my explanations more succinct. It is my hope that this quick guide will be of use to you, and your friends and family, who are also learning about Bitcoin for the first time.
What is Bitcoin?
Bitcoin is a digital store of value. Think of it like Gold, a scarce and finite commodity that you can hold for a rainy day, but digital.
Bitcoin is build on a blockchain. A blockchain is akin to a Google Sheet with a series of transactions and IOUs. Instead of paper passing hands, we record the transaction in the sheet, and it is visible to everyone, all the time.
Who created Bitcoin?
Bitcoin was created by an anonymous software engineer (or group of engineers) under the pseudonym Satoshi Nakomoto. The concept of Bitcoin was first introduced on October 31, 2008, in a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.”
The first Bitcoin was created on January 9th, 2009 in response to massive government bailouts for banks. In fact, the very first block of Bitcoin contained a secret message in the code quoting the UK Times headline: “03/Jan/2009 Chancellor on brink of second bailout for banks.” This was a direct nod to the instability caused by fractional-reserve banking.
How are additional Bitcoins created?
New Bitcoins are created every day through a process called ‘mining’. Miners lend computing power to verify Bitcoin transactions by solving complex mathematical problems, and get new Bitcoins as a reward. This process requires energy, which has a built-in cost. With time, the same amount of energy produces less Bitcoin, increasing the price of Bitcoin over time.
Is Bitcoin backed by the government?
No. Unlike other types of commonly-used money, Bitcoin is not backed by a government. Just like Gold and Silver, Bitcoin should be viewed as an independent commodity.
Is Bitcoin anonymous?
Yes and no. Each Bitcoin wallet has one or more addresses. A bitcoin address has 26-35 alphanumeric characters unique to that wallet. The wallet is not attached to any name, phone number or other identifying information. It is possible to track the flow of funds from one wallet to another since all transactions on the blockchain are public, but identifying that transaction as specifically yours is nearly impossible, unless you made your address publicly known.
What drives the price of Bitcoin? What gives Bitcoin value?
Bitcoin is considered a scarce asset. There are approximately 18 million Bitcoins today. The maximum amount of Bitcoins possible is 21 million, with the final Bitcoin expected to be mined by 2140. The rate of new Bitcoins mined decreases by half approximately every four years, while the energy required to make each Bitcoin generally increases over time.
Bitcoin’s value is also driven by geopolitical instability. There are countless stories of people in Lebanon, Ukraine and Venezuela using Bitcoin to shelter and transport wealth outside the purview of corrupt governments.
Furthermore, as instability continues to threaten the American economy, many investors are hedging their portfolios with gold, real estate and Bitcoin.
Finally, as with any asset including stocks, gold and diamonds, the more people believe in the value of an asset, the more valuable it becomes.
Why is Bitcoin so volatile?
The market capitalization of Bitcoin is approximately $200 billion U.S. dollars. To put this into perspective, the market capitalization of Apple’s AAPL publicly traded stock is almost $2 trillion U.S. dollars or ten times the size of all of Bitcoin. That means Bitcoin, as a relatively new asset, is more susceptible to market volatility as speculators drive the price. Furthermore, unlike the stock market, Bitcoin trades 24/7 globally.
How do I buy Bitcoin?
There are three simple ways to buy Bitcoin: through a reputable exchange, a Bitcoin ATM or a peer-to-peer transaction. Some exchanges accept credit cards, although going into debt to buy cryptocurrency is not recommended.
Do I have to buy a whole Bitcoin?
No. At the time of writing, the price of 1 Bitcoin is $10,800. Many of us may not want to spend that much on a first-time risky investment. And that’s ok! There are 100 million Satoshi’s in a Bitcoin (kind of like digital pennies). That means you can buy a small fraction of a Bitcoin to get you started.
Do you have to pay taxes on it?
Yes. In the U.S., the CFTC has determined that Bitcoin will be treated as a commodity. The sale of Bitcoin is taxed similarly to the sale of any other asset such as company stock or investment property. If you hold Bitcoin for more than a year, the profit on the sale will be taxed at your capital gains rate. If you hold it for less than a year, the profit from the sale will be taxed as ordinary income.
How do you store Bitcoin?
The easiest way to store your Bitcoin is on a third-party reputable exchange such as Coinbase, Gemini or Binance.
One of the benefits of owning Bitcoin, however, is to be your own ‘Swiss bank.’ No third parties required. There are an array of hardware wallets on the market today to allow you to be your own bank – stay tuned for an upcoming story on wallets next week.
How do I spend Bitcoin? Can I pay my bills with it?
Some stores and online retailers have started to accept Bitcoin directly. More commonly, you can sign up for Bitcoin Visa cards, such as Crypto.com and Swipe to spend your Bitcoin anywhere Visa is accepted.
Is Bitcoin better than other crypto currencies?
Bitcoin is the first widely adopted cryptocurrency and the only one with an anonymous founder, making it seem more like a commodity than a software invented by a human. Bitcoin remains superior (even if not in speed and transaction cost), due to its network effect. Although it is impossible to identity exactly how many Bitcoin users there are today, there are approximately 42 bitcoin wallets in existence as of 2020.
Can I send Bitcoin across borders?
Absolutely. Check out this community in El Salvador that built an entire economy from Bitcoin donations and remittances.