Explaining the polarizing world of crypto-currency & Bitcoin

Depending on who you ask, bitcoin is a speculative product — or even a scam — that poses risks to the stability of the financial system and undermines efforts to reduce carbon emissions that drive damaging climate change, or it’s a revolution in finance and technology that gives people access to better, cheaper financial services not under the control of big banks or nosy governments, and will one day become the world’s most important currency.

What’s not in dispute is that Bitcoin has become a significant economic force and Kentucky has become a key player in bitcoins being issued.

So for those new to bitcoin, a primer:

WHAT IS IT?

Bitcoin is a cryptocurrency, or digital currency. It was conceived as a way to let people make payments without going through third parties such as banks. It is not controlled by any government.

ARE THERE OTHERS?

Yes, thousands of cryptocurrencies sprang up after Bitcoin was created. Ether, Tether and Dogecoin are other cryptocurrencies you may have heard of, but Bitcoin is by far the largest in terms of market capitalization.

It is known as Bitcoin when referring to the network it runs on, and bitcoin when referring to an individual unit of currency.

HOW DID IT START?

Someone, or maybe a group of someones, using the pseudonym Satoshi Nakamoto published a paper in late 2008 titled Bitcoin: A Peer-to-Peer Electronic Cash System, that described a system to allow currency to be transferred securely between any two people, anywhere, over the internet.

Peer-to-peer means no central authority issues the money or tracks transactions.

Nakamoto — whose identity has never been revealed — believed banks and governments had too much power over financial transactions and used that power for their own interests, so outlined a currency system outside that traditional network.

WHAT IS MINING?

Bitcoin is “mined” by specialized computers. They run a program over and over to find a number. Millions of the computers around the world compete against each other.

About every 10 minutes, a miner somewhere finds the target number and the Bitcoin system issues new bitcoins to the winning company or mining pool.

The amount of coins awarded gets cut in half every four years. The prize is currently 6.25 bitcoins, meaning about 900 are issued daily.

The value of bitcoin can vary widely; it ranged from less than $30,000 to more than $67,000 over the last year.

At midday April 15 it was trading at about $40,500, meaning 6.25 bitcoins were worth just over $250,000.

CAN I MINE BITCOIN?

In the early days, people mined bitcoin with laptops, but as the competition increased, the difficulty did as well, requiring far more computing power than the typical laptop.

It’s unlikely that someone with only a handful of machines could win the race to find the correct number against companies with thousands of machines.

However, individuals and companies can become part of mining pools, and they share in the reward based on the amount of computing power they contributed.

The mining machines can cost $10,000 or more.

IS THERE A LIMIT?

Yes. The network is set up so that only 21 million bitcoins will ever be issued.

So far, about 19 million of those have been issued, leaving only 2 million for miners to get.

But the system is designed to make the competition more difficult as the number of unreleased bitcoins goes down, so in theory all the bitcoins won’t be mined out until about 2140.

Miners also get fees for verifying transactions, which will continue even after all the bitcoins are mined.

Supporters, who like the fact that bitcoins can’t be printed like traditional dollars, believe the limit on bitcoins will ensure they will hold or increase in value.

Skeptics argue that scarcity alone does not create value — that cryptocurrencies have value only because people think they do, and that that could change. Economist Eswar Prasad of Cornell University has said bitcoin investors seem to be relying on the “greater fool” theory that all you need to profit from an investment is to find someone willing to buy the asset at an even higher price.

President Joe Biden recently signed an order that could lead to greater regulation of cryptocurrencies.

Researchers estimate that up to 20 percent of the bitcoin issued so far has been lost for various reasons, including people forgetting the key — essentially, the password — to access their bitcoins.

WHAT IS BLOCKCHAIN?

The technology that underpins Bitcoin and many other cryptocurrencies is the blockchain, which is essentially a gigantic, running online ledger.

Every bitcoin transaction is logged on the ledger and periodically gathered into a block that is added to the chain. When a mining computer finds the number and new bitcoins are issued, that finishes a block and it is recorded on the ledger.

Shane Hadden, who teaches about cryptocurrency at the University of Kentucky, calls this bitcoin’s “big invention.”

“When someone makes a valid transaction on the Bitcoin network a “miner” makes sure the transaction is valid and puts it in the ledger in exchange for payments in bitcoin,” Hadden said. “We can trust that these payments are valid because the miners are paid based on a random selection in proportion to how much computing power they use in the mining process. The record will always only contain valid transactions so long as at least half of the computing power used in the network is used by honest miners.”

Unlike some other records, the database is not stored on a particular server, but distributed across the entire network of computers on the blockchain, making it very difficult to hack or cheat the system.

The blockchain is public so anyone can see the transactions, though not the identities of the people making trades or getting bitcoins.

Blockchain has uses outside cryptocurrency, such as data storage, supply-chain management and decentralized financial services.

WHAT IS IT GOOD FOR?

For many buyers at this point, bitcoin is an investment, similar to buying gold.

Most businesses in Kentucky and the U.S. don’t yet take bitcoin directly for purchases.

However, people who have the digital currency can make purchases with a debit card linked to their crypto account, or exchange bitcoin for cash, and the number of places that accept bitcoin directly through an app is increasing.

Sources for this article include the original Bitcoin white paper, Investopedia, Coinbase, Euromoney.com and interviews with Patrick Ulrich, a partner with attorney Dan Carman in Lexington Bitcoin Consulting, and Shane Hadden, a lecturer of finance at the University of Kentucky’s Gatton College of Business.

This story was originally published April 21, 2022 10:00 AM.