This Awesome Infographic Explains WTF Bitcoin is, How it Works

Confused about cryptocurrency? Here’s everything students need to know about how Bitcoin works.

Chances are, by now you’ve heard the word cryptocurrency—particularly, Bitcoin. It’s practically plastered across the Internet.

But do you really know any more than what you’ve seen on bitcoin memes (this one’s my favourite)? I’ve taken the time to figure out this cryptocurrency stuff so you don’t have to.

I’ll break down how cryptocurrencies work, what bitcoin is, and explain how a doge-based digital currency came to be. We’ll also chat about where you can buy a Lamborghini with cryptocurrency, the exciting moves Canadians are making, as well as the world-changing potential (both good and bad) that these currencies hold.

So how do they work?

Cryptocurrencies are essentially a digital form of money.

They are stored in digital bank accounts called wallets, and can be set up at home by anyone with Internet access. You don’t have to go into your local branch, and there’s no need to sign paperwork with those pens you only see at banks.

This digital money removes the middleman, by creating a system that allows strangers to deal directly with each other.

It does this by taking the record-keeping role away from financial institutions.

Instead, this work is handled by a network of computers.

These computers stand-in for the middlemen since they can just as effectively tell us whether the other party of a transaction is good for their money. This network of record-keeping computers is called a blockchain. Since there’s no single point of control, it’s virtually impossible to shut down.

And Bitcoin is…?

Bitcoin is the most popular cryptocurrency. Launched in the aftermath of the 2008 financial crisis, it offered an alternative to the imploding financial system. Within a few years, an entire counterculture movement formed around bitcoin and cryptocurrencies, and the circle of believers has continued to grow.

There are two main aspects of bitcoin:

1) bitcoin the currency (lowercase b), allows people to send digital money directly to each other. No banks or credit-card companies needed.

2) Some people argue the greater contribution is Bitcoin the technology (capital B). This refers to the software that gives instructions to the transaction-verifying computers on how to communicate with one-another.

You may have also heard the term bitcoin mining. The name’s pretty misleading.

When I first heard it, I thought it involved hard hats and Tonka Trucks. It’s actually the process computers go through to verify transactions, like bookkeeping. As a reward for doing this work, the computer owner receives bitcoins.

Ok, now what makes this digital money so special?

There are two big benefits: more efficient and cheaper money transfers, and giving the “unbanked” access to a financial system.

Cryptocurrencies have the capacity to make electronic payments cheaper and more efficient by cutting out the middlemen. On each credit card transaction, 2-3% of the money gets gobbled-up by the credit card industry.

Cryptocurrencies would allow this money to go into the pockets of store-owners, or to be passed onto shoppers.

This new technology also has the ability to improve money transfers across borders. The current financial system ensures that only part of the money gets to where it’s supposed to go.

With fees and exchange-rates, the total amount “lost” in the transaction can be as high as 30%. In countries where annual salaries can be counted in hundreds of dollars, these costs are a serious problem.

This digital money also benefits the “unbanked”—the roughly 2.5 billion people from Afghanistan to Kenya to even America who have been shut out of the modern finance system.

They can’t start savings accounts or get credit cards. They are limited to cash transactions.

Take Fatima for example. She is a refugee living in a camp in Mali.

Her husband immigrated to Ivory Coast for work, as so many Malians do, and would send money back when he could. How he did it was quite the feat.

Fatima’s husband sent money back through people. Random people, people who were headed in the direction of his wife and family. Fatima’s family didn’t have any bank accounts, or even IDs. Sometimes the money arrived. Sometimes it didn’t.

She did however have a $5 cell phone. Without savings accounts, without access to banking services, a solution may lie in those $5 phones.

Cryptocurrency visionaries believe that in the future, anyone will be able to send digital currency via text message.

Individuals like Fatima lack access to banks. Not because they don’t have an education. But because of the obstacles confronting people of limited means.

To open a digital wallet, there’s no need for documentation—your location, name, and gender are unimportant. This is a game-changer for women in patriarchal societies. It allows them to take control of their own money and build something that is theirs.

Is it really all rainbows and sunshine?

Did you expect everything to be rosy?

As with everything, cryptocurrencies have their fair share of challenges. Most stories about bitcoin have focused on the roller-coaster ride of prices; the drug dealers who were busted using bitcoin on the illicit Silk Road site. Or the sudden vanishing of large numbers of bitcoins from Mt. Gox, the Tokyo-based exchange.

Some also worry that if bitcoin were to replace an existing currency, like the dollar or yen, that the change could instigate economic crises. This shift would strip governments the ability to adjust the money supply and to offset people’s instinct to hoard at times of panic.

Another possibility is that cryptocurrency could completely flame out, like VHS tapes.

Remember those? Or their daily-use could remain limited, like the once hyped Segway.

All of these elements are important in understanding the story of bitcoin and cryptocurrencies. But to dismiss it as a scam because of them is to turn your back on something that has the potential to be life-changing.

So it has potential, but where can I use digital money?

Many startups have been created to allow and expand the use of bitcoin in everyday life, for example:

→ Mt. Gox was the first major bitcoin exchange, and in the early days it was virtually the only place to trade coins.

 Silk Road was the first big bitcoin business, playing a key role in the development of bitcoin by expanding its community of users.

 BitPay and Coinbase provide payment-processing services, offering an easy way for merchants to receive bitcoins.

 SatoshiDice is an online bitcoin gambling service. It’s gaining a lot of traction because users know its computer-driven games of chance are fair.

 Purse provides a backdoor means of buying goods with bitcoin on Amazon.

Although these services and more exist, in the grand-scheme of things, there are still only a few options for spending bitcoin.

However, a number of high-profile businesses have now added bitcoin as a payment option. Firms such as online retailer Overstock.com, the Sacramento Kings basketball team, cable provider Dish Network, Dell computers, popular ecommerce platform Shopify, and travel site Expedia are all merchants accepting bitcoin.

There are also a whole host of local bitcoin-accepting restaurants and shops.

Maybe you’re reading stories about bitcoin purchases of villas in Bali. Or Lamborghinis in California. Or Virgin Galactica tickets to outer space. But this currency can also be as a force for good. Sean’s Outpost is a homeless shelter in Pensacola, Florida that’s funding comes entirely from bitcoin donations.

What about the other cryptocurrencies?

By 2011, bitcoin had inspired others to join the cryptocurrency game.

Some attempted to improve upon bitcoin’s flaws, and others were out-right copies. As of this writing, 1453 of these “altcoins” exist.

Most fall well short of bitcoin in ranks, but a few have respectable followings. Ethereum (invented by a University of Waterloo dropout) and Ripple, are the second and third largest cryptocurrencies respectively. At the time of writing, their market caps (essentially the size of the currency) were $104B and $63B. Bitcoin’s towers at $197B.

Another example is dogecoin, a joke altcoin that started in 2013.

The “doge” comes from the smiling Shiba Inu meme. It’s appeal comes from two main principles: dogecoin is fun, and its members use their currency to do good deeds.

They’ve since raised $25,000 for a Jamaican bobsled team short of funds for the 2014 Olympics, donated $30,000 to build clean-water wells in Kenya, and even sponsored a NASCAR driver.

What’s Canada’s role in all this?

Canada’s biggest cities are getting in on the action and becoming leaders in this booming industry.

Toronto is home to the startup accelerator, Bitcoin Decentral, which has spawned the previously mentioned Ethereum, and the digital-wallet provider Jaxx.

Meanwhile, in Vancouver, Axiom Zen is behind the popular online game CryptoKitties that almost crashed the Ethereum network. This west-coast city is also home to the world’s first bitcoin ATM.

The Canadian government even dipped their toes in the water, exploring the idea of a digital Canadian dollar with MintChip, eventually selling the technology to the private sector.

Can cryptocurrency really change the world?

If bitcoin or any other cryptocurrency are going to be a revolutionary force for change, some evolution will have to happen first.

At a bare minimum, people have to feel that cryptocurrencies are safe and won’t suddenly lose value.

Would I put my life savings into bitcoin today? Heck no.

Gavin Andresen, bitcoin’s lead developer has shared, “Every time I give a talk, I emphasize that bitcoin really is still an experiment; every time I hear about somebody investing their life savings in it, I cringe.” And that’s coming from the guy responsible for keeping the whole thing running.

However, bitcoin’s volatility seems inherit for the time being. Earning respect and widespread adoption as a currency is a process. They won’t achieve it overnight. Eventually, this volatility must be contained for bitcoin to live up to its promise as a low-cost, efficient way for people to exchange money.

It could be bitcoin, ethereum, another cryptocurrency, or one that hasn’t yet been created, but this groundbreaking technology has a momentum that will be hard to stop.

More importantly, it solves some big problems that are nearly impossible to address with the current financial infrastructure.

Cryptocurrencies have the potential to remove virtually all costs that the payment system imposes on our global economy, and bring billions of individuals out of poverty. In my eyes, the future is much more exciting with cryptocurrencies in it.

 

*Opinions expressed are those of the author, and not necessarily those of Student Life Network or their partners.
Adam Vassallo

Adam Vassallo

Adam is the Co-Founder of Don’t Freak Out! -an organization dedicated to improving student financial literacy. When he’s not sleeping through his morning alarm, you can find him in class at Queen’s University.