Bitcoin

The cryptocurrency Bitcoin is never out of the news cycle for long. How does it actually work and is it possible this so-called currency is more like a commodity?

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Episode Transcript

Speaker 1 (00:03):
In August, the value of a single bitcoin reached a
staggering four thousand dollars. What's the story behind this cryptocurrency?
I'm Jonathan Strickland, and this is tex Stuff Daily. Let's

(00:26):
imagine it's Halloween two thousand and eight and we're listening
to tales from the crypt oh currency. On that day,
a mysterious person or persons going by the name Satoshi
Nakamoto published a white paper about a new type of
currency that wouldn't be tied to any nation or bank system.

(00:46):
It would exist on a peer to peer network of computers,
and the record of transactions using this currency would become
an intrinsic part of how it worked. The white paper
called the currency Bitcoin. In that paper, Nakamoto laid out
the case for a new currency. He or she or
they said that transactions between two entities online necessitated the

(01:10):
involvement of a third party that would facilitate this transaction,
which in turn required trust to exist between all the
parties in question. Now, in the physical world, you could
stride up to a vendor, plunk some physical currency down,
and purchase something with no other party's involvement. Not so
with online transactions that need for trust brings other issues

(01:34):
to the foreground. For example, to limit abuse of the system,
third parties might request a great deal of information about
the two entities making transactions. People concerned about their privacy
might be worried that this data could potentially come back
to haunt them, and from the third party's perspective, there's
always the chance someone commits fraud, leaving the third party
liable as the one that facilitated the transaction in the

(01:56):
first place. The peer to peer cryptocurrency approach by passes
this problem. It all gets a bit technical, but we
can explain it on general terms. Imagine a network of
computers joined through using a common suite of cryptocurrency software.
These computers are scattered across the world, and they share

(02:16):
information about every transaction that happens using this cryptocurrency. The
computers pack these transactions into blocks. Those blocks form a chain.
Every single transaction is part of this blockchain, with computers
in the network constantly validating transactions so that no bitcoin
may be spent by the same person twice. The peer

(02:39):
to peer network creates a decentralized structure. No one entity
is in charge of the fate of bitcoins, so there's
no single point of failure. When people first began to
use bitcoins, they weren't worth very much. A single dollar
was equal to more than one thousand bitcoins. Oh, how
the tables have turned. While Bitcoin has experienced from matic

(03:00):
ups and downs. In August, the value of a single
bitcoin hit the incredible four thousand dollar mark. This volatility
has led some people, including myself, to suggest bitcoin is
more like a commodity than a currency. When the value
of your currency fluctuates wildly, there's less of an incentive
to use it as an actual currency. How would you

(03:22):
feel if you paid a dollar for a candy bar
only to find out the next day that this same
dollar could have bought four thousand candy bars. There's a
lot more to bitcoin as well. For one thing, there's
a finite number of bitcoins that will ever exist. Eventually,
every bitcoin that can exist will be in circulation. That
number is just three bit sents short of twenty one

(03:45):
million bitcoins. The way more bitcoins inner circulation is through mining.
Mining is the process of validating and storing transaction information
in the bitcoin blockchain by solving complex mathematical problems with
a computer. As you apply more processing power to this operation,
the operations get more complex. There's no perfect analogy for this,

(04:07):
but imagine a gold mine in which the gold could
actually hide itself further away if miners were bringing in
heavy duty mining gear. The slighting difficulty scale helps ensure
that bitcoins inner circulation at a pre established rate. In addition,
there's a schedule to release a certain number of bitcoins
every time a new block is mined. That schedule requires

(04:29):
a smaller number of bitcoins issued as a reward per
successful mining operation over time. For example, when they first
came out, you could get fifty bitcoins for mining a block.
Before June nine, the rate was about twenty five bitcoins
for successfully mining a block, and after that date it
dropped down to twelve point five bitcoins. Over time, this

(04:52):
number will again be reduced by half, and then again
and again until sixty four. Divisions will happen, and reward
will reach its lowest point until all the bitcoins that
will ever exist have entered circulation. And like most currency,
you can divide a bitcoin into smaller amounts. With American currency,

(05:12):
we have quarters, dimes, nickels, and pennies. With bitcoin, you
can divide down to eight decimal places. So while a
penny is point zero one of a dollar, the smallest
increment of a bitcoin is point zero zero zero zero
zero zero zero one bitcoins. Why are bitcoins worth so much?

(05:35):
That's because people put that much value in them. When
you get down to it, a currency's value depends upon
the faith placed in it by a population. If the
confidence drops away, no one will accept the currency as payment.
There's nothing intrinsically valuable about it. To learn more about bitcoins,
be sure to subscribe to the tech Stuff podcast, where
we explore topics like this in detail. If you've ever

(05:57):
wondered how the large Hadron collider works, or you want
to know the story behind the Night three video game crash,
you should check out tech Stuff. Episodes publish every Wednesday
and Friday. That's all for me for now, See you
next time.