It’s the first example of a growing category of money known as cryptocurrency.
Bitcoin is a digital currency or cryptocurrency that was created in 2009 by an unknown person using the name Satoshi Nakamoto. Transactions are made with no middle men (meaning, no banks!). There are no transaction fees and no need to give your real name. More merchants are beginning to accept them: You can buy web hosting services, pizza or even manicures.
How is it different from normal currencies?
Bitcoin can be used to purchase things electronically. Meaning that, it’s like conventional dollars, euros, naira, pounds or yen, which are also traded digitally.
However, bitcoin’s most important characteristic, and the thing that differentiates it from conventional money, is that it is decentralized. No single institution controls the bitcoin network. This puts some people at ease, because it means that a large bank can’t control their money.
Who created it?
Bitcoin was proposed by a software developer called Satoshi Nakamoto, as an electronic payment system based on mathematical proof. The idea was to produce a currency independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees.
Who prints it?
Bitcoins are printed by no one. This currency isn’t physically printed by a central bank, or managed by any government. Instead, bitcoin is created digitally, by a community of people of which anyone can join. Bitcoins are ‘mined’, using computing power in a distributed network.
This network also processes transactions made with the cryptocurrency, effectively making bitcoin its own payment network.
So can you churn out unlimited bitcoins?
The answer is NO. The bitcoin protocol – the rules that make bitcoin work – limit the total amount of bitcoins that can ever be created by miners to 21 million bitcoins. However, these coins can be divided into smaller parts (the smallest divisible amount is one hundred millionth of a bitcoin (0.00000001 BTC) and is called a ‘Satoshi’, after the founder of bitcoin).
What is bitcoin based on?
Bitcoin is based on mathematics.
Around the world, individuals are using software programs that follow a mathematical formula to create bitcoins. The mathematical formula is freely accessible, so anyone can check it. The software is additionally open source, meaning that anyone can inspect it to make certain that it does what it’s supposed to.
What are its characteristics?
Bitcoin has several important features that set it apart from government-backed currencies.
1. It’s decentralized
The bitcoin network isn’t controlled by one central authority. Every machine that mines bitcoin and processes transactions makes up a part of the network, and the machines work together. That means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown – or simply decide to take people’s bitcoins away from them, as the Central European Bank decided to do in Cyprus in early 2013. And if some part of the network goes offline for some reason, the money keeps on flowing.
2. It’s easy to set up
Conventional banks make you jump through hoops simply to open a bank account. Setting up merchant accounts for payment is another Kafkaesque task, beset by bureaucracy. However, you can set up a bitcoin address in seconds, no questions asked, and with no fees payable.
3. It’s anonymous
Well, kind of. Users can hold multiple bitcoin addresses, and they aren’t linked to names, addresses, or other personally identifying information. However…
4. It’s completely transparent
…bitcoin stores details of every single transaction that ever happened in the network in a huge version of a general ledger, called the blockchain. The blockchain tells all.
If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address. They just don’t know that it’s yours.
There are measures that people can take to make their activities more opaque on the bitcoin network, though, such as not using the same bitcoin addresses consistently, and not transferring lots of bitcoin to a single address.
5. Transaction fees are minimal
Your bank may charge you a £10 fee for international transfers. Bitcoin doesn’t.
6. It’s fast
You can send money anywhere and it will arrive minutes later, as soon as the bitcoin network processes the payment.
7. It’s non-repudiable
When your bitcoins are sent, there’s no getting them back, unless the recipient returns them to you. They’re gone forever.
So, bitcoin has a lot going for it, in theory. But how does it work, in practice? Read more to find out how bitcoins are mined, what happens when a bitcoin transaction occurs, and how the network keeps track of everything.
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