What is Bitcoin?

My friend Karen Hao just published an article in Quartz describing how students today can mine cryptocurrency in their dormrooms. After reading Karen's excellent article, I wanted to learn more about cryptocurrencies (like Bitcoin) so I started doing a little research online. I have listed all my sources at the bottom of this post, and in addition to Karen's article, I would like to recommend the 99Bitcoins organization as a good educational resource.

Source: https://www.bitcoin.com/getting-started

Cryptocurrencies are digital currencies that use cryptography to secure the transactions and assets of that currency [1]. There are a variety of cryptocurrencies in use today - the most well-known is Bitcoin, because of its recent explosive increase in value. Cryptocurrencies perform the same function as traditional currencies. Ariel Horwitz and 99 Bitcoins gave a good introduction to the development of currency over time that led to cryptocurrencies ([2], [3]). In summary, the earliest currencies used tangible objects like conch shells or precious metals (gold) to denote value. The more you had of one of these items, the wealthier you were. Gold in particular was favored around the world. In the United States, paper money was introduced originally as a certificate guaranteeing the owner that there was a certain amount of gold tied to that certificate and stored in a vault somewhere. The US dollar was on the gold standard (i.e. where every dollar corresponded to a tangible unit of gold stored in a vault) until the 1970s. In the 1970s, the US government decided to leave the gold standard, making the US dollar a "fiat" currency, meaning that everyone agreed the dollar bills themselves represented value, and did not need to be tied to a quantity of gold. Since dollar bills are difficult to counterfeit and are guaranteed by the US government, this system works. Now in the 21st century, we can use US dollars online to make purchases, instead of paper money. This also works because individual banks maintain ledgers that track how much money each individual has, so it is still a controlled system. The innovation that Bitcoin brought in 2008 was that instead of using a centralized bank to track the amount of money each customer has, the entire currency system would be decentralized ([3]). There is one giant ledger that tracks every bitcoin transaction ever made (called the blockchain [4]) which is publicly available to anyone and stored on thousands of servers and computers around the world. The work done to maintain the ledger is computationally expensive and is done by miners ([5]). Anyone with a computer powerful enough to perform the computational work can mine for Bitcoin and they are paid for their services in Bitcoin. Thus Bitcoin sustains itself as a currency by decentralizing the ledger system and paying individuals to perform the computations necessary to maintain the blockchain.

Karen's article is fascinating because many people do not mine Bitcoin because the electricity costs can be prohibitively expensive. A computer that has the specifications of a gaming computer (i.e. it must have a graphics processing unit and a good cooling system) is needed to mine for cryptocurrencies like Bitcoin, and so it consumes a lot of electricity constantly. However, Karen has found that many savvy college students are able to mine for cryptocurrencies in their dormroom because they are not paying specifically for electricity - it is covered as part of their room and board costs - and universities are not cracking down on this practice of mining for Bitcoin [6]. As a result, most college students have a higher profit margin than most miners because they do not count electricity costs as an expense.

In addition to access to cheap electricity, Karen points out that many students are mining for other cryptocurrencies like Ethereum, not Bitcoin. When Bitcoin's value on the market exploded, the computational costs to mine it also increased exponentially. However, there are many other, small-scale cryptocurrencies that still need miners, such as Ethereum. The computations required to mine these currencies are still cheap compared to mining for Bitcoin, and so mining for cryptocurrencies continues to be a popular activity for today's college students [6].

Sources:

[1] https://en.wikipedia.org/wiki/Cryptocurrency

[2] Beigel, O. https://www.youtube.com/watch?v=yTxmR0n6sCc

[3] Horwitz, A. https://99bitcoins.com/bitcoin-whiteboard-tuesday-what-is-bitcoin/?utm_source=99Bitcoins+blog+updates&utm_campaign=55c8f35914-Bitcoin_crash_course_videos8_6_2015&utm_medium=email&utm_term=0_ca691db33c-55c8f35914-122910317

[4] https://en.wikipedia.org/wiki/Blockchain

[5] https://en.wikipedia.org/wiki/Bitcoin

[6] Hao, K. The secret lives of students who mine cryptocurrency in their dorm rooms. Quartz; Jan 6, 2018. https://qz.com/1160667/the-secret-lives-of-students-who-mine-cryptocurrency-in-their-dorm-rooms/