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How Bitcoin Works and Why You Should Care

By Jan Rankowski

If you’re paying attention you’ve probably heard about Bitcoin, but most people either don’t care or don’t understand it as anything more than “magic internet money.” In this article, I’ll give a very brief summary of why you should care, and how Bitcoin works. If you pay attention, you might learn something, or even earn some money from this article.

Why you should care: Bitcoin allows even poor people to get rich quick if they’re smart enough. Yes, that means you, college student with $73 to your name. Before Bitcoin, if you wanted to get into day trading, you’d need a lot of money up front in order to net appreciable gains. With Bitcoin, you can start with only $50 and double that
within a few days if you’re clever about it. If you’re really patient, you can make even more; I bought a measly $200 of Bitcoin when the price was at 1600 — a few months later and the price was at 20,000, and I’d sold for a 1250 percent profit of $2500.

This is a benefit but also a risk. Taking this greater risk also necessarily opens you up to the possibility that you’ll lose everything you’ve invested just as quickly as you could have earned more. In investing, 90 percent of new traders lose 90 percent of their initial investment within 90 days. Bitcoin is extremely volatile, more so than the stock market, because there’s less money in it right now. Tons of people are hiding money from the IRS with stocks, so you need to pour in huge amounts of cash to even see a 3 percent profit — not really worth it to the average person.

At this point, cryptocurrency is still in its infancy and is only going to get more popular as time goes on, so it’s worthwhile to learn about it now. Another reason to care about Bitcoin is that if you’re paranoid (justifiably) about the future of the U.S. dollar,cryptocurrencies can act as a “hedge” to make sure you don’t have all your eggs in one basket, so you’ll still have something even if the dollar falls in value.

Now that you have a reason to actually care, I’ll give a very basic summary of how Bitcoin works and the technological advantages it offers over our current system of paper money.
First, there’s decentralization. Rather than trusting a single central authority to maintain bank records, Bitcoin uses a “notrust” system where nobody has any more authority than you do, so systemic monopolies are impossible. Every time you make a transaction, it is appended to a distributed ledger that millions of computers are automatically maintaining online. These computers act as robotic bankers which log, authenticate and process your transactions, and get paid a small fee for it — this is called “mining.”

Think of it like a supercomputer distributed across millions of computers around
the world, with no single person in charge of it. This means there is nobody controlling the supply of the currency, unlike the U.S. Dollar, which is managed by the Federal Reserve and is manipulated from the top down to create destructive boom-bust cycles that generate profits for the top 1 percent. This is impossible with Bitcoin.

Without a central authority, who prevents fraud? Instead of relying on human intervention, the Bitcoin ledger uses cryptographic math to prevent fraud. A “public key” is basically your Bitcoin address, which people send money to and receive money from. In order to send money to someone, you need to prove that you own the public key you are trying to send money from. This is similar to a handwritten signature on a paper check, only it can’t be forged since it’s protected by cryptographic math. Instead of signing a check, the system uses your “private key” (think of it like the password to your Bitcoins) and combines it with your public key to produce a “digital signature,” which basically proves to the rest of the world that you are in fact the valid owner of the account you are trying to send money from. Since it’s cryptographically protected,
nobody will be able to figure out what your private key is, even if they look at your digital signature. Bitcoin does this process for every single transaction — each transaction has its own digital signature.

This is only a very basic summary of how Bitcoin works, but hopefully it’s just enough to get you curious and interested. For more information and a more detailed explanation,go to janrankowski.com/bitcoin.

Jan Rankowski is a member of the Information Technology Senior Seminar course and is
planning on a career in cybersecurity

Categories: Uncategorized

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