The concept of Bitcoin can mean several different things depending on a particular set of people. For a few, it is a future where you can be able to freely move currency without ties to central banks. For others, it is just a digital entity with a dubious origin and questionable value. Some even see it as a mythical and weird “currency”!
But really, what is Bitcoin? In a lot of casual discussions, you won’t be wrong if you say bitcoin is fundamentally a digital currency. In fact, you’ll sound well versed in that field. However, the definition of Bitcoin is a lot more complicated than earlier mentioned. Here, you’ll learn all about this cryptocurrency and hopefully, in the end, you’ll be able to sound more enlightened in those casual discussions!
To reduce a huge chunk of the confusion that usually surrounds Bitcoin, there’s a need to group it into two different components. On one hand, there’s bitcoin (the token) which is a code representing the ownership and possession of a digitized concept – almost similar to a virtual IOU. In the other group, there’s bitcoin (the protocol) which is a network of a distributed nature that controls a ledger containing the balances of bitcoin (the token). These two groups – even though they have huge dissimilarities – are both called “Bitcoin.”
This system ensures that payments can be transferred between users all without the need of these payments encountering any kind of central authority – whether a payment gateway or bank. Unlike euros or dollars, bitcoins are not printed but are produced with the help of computers all over the world while making use of free software. These bitcoins are made and are electronically held. Owners of bitcoin are always anonymous. Instead of making use of names, social security numbers or tax IDs, bitcoin ensures that connection between sellers and buyers is carried out using encryption keys.
Bitcoin was created almost ten years ago (2009) by an individual or set of individuals who called either himself (or their self) Satoshi Nakamoto. His main aim was to establish an electronic fiat system that was completely new, refreshing and revolutionary. This system was to be 100% decentralized – devoid of any central authority or server.
After coming up with the technology and concept, Nakamoto, in 2011, handed the source code and its domains over to other individuals in the bitcoin ecosystem. After doing this, he (or they) subsequently vanished. Bitcoin was and will remain the first and foremost example of what we now call cryptocurrencies which is a continually developing asset group that has some features of orthodox currencies.
An individual, company or group can mine bitcoin by executing a combination of record keeping and advanced math. This is how it usually works: When a user transfers a bitcoin to another person, the network makes a record of that particular transaction and a host of others that have been made within a defined length of time. This will be recorded in a “block”. The computers that run a special specific software (i.e. the miners) will etch these transactions onto a very large digital ledger. These blocks mentioned are collectively known or referred to as the “blockchain” which is an everlasting, open and accessible record comprising of every transaction that has ever been carried out.
With the help of very powerful hardware (that are usually energy-intensive) and specialized software, miners will be able to turn these blocks into series of code referred to as a “hash”. This is actually more arduous than it looks or sounds because the production of a hash requires a lot of computational power and a host of miners simultaneously compete to complete the process. It’s almost like a multitude of chefs trying their best to hastily prepare an extremely difficult dish with only the first of them to serve a seamless version of it being rewarded. Imagine that!
After a new hash has been generated, it is positioned at the rear of the blockchain. This is then propagated and updated publicly. For all his or her efforts, the miner will currently get 12.5 bitcoins which are roughly worth up to $100,000. It should be noted that the total of bitcoin to be awarded reduces over time.
Difference between Bitcoin and traditional currencies
If two parties are willing, bitcoin may be utilized to electronically pay for things. With this, it is similar to conventional euros, yen or dollars which can also be digitally traded. However, it has several striking differences.
The most important feature of bitcoin is its decentralized nature. There’s not a single institution that controls its network. Maintenance is ensured by several volunteer coders and also it is run with the help of an open network comprising of dedicated computers all over the world. This will attract groups and individuals that are not comfortable with government institutions or banks handling and having control of their money.
- Limited supply
There’s an unlimited supply of fiat currencies (e.g. euros, yen, dollars) and central banks have the power to issue as much as they want. They can also try to manipulate the value of a currency relative to other ones. The cost of this is usually left for holders of the currency to bear. However, with bitcoin, the underlying algorithm tightly controls the supply. Every hour, a very small amount of fresh bitcoins are released and this will continue at a diminishing rate till 21 million has been released – which is the maximum. This ensures that bitcoin is more of an attractive asset than fiat currencies.
Unlike the electronic transactions of other fiat currencies, bitcoin transactions are irreversible. This is due to the fact that there isn’t a main adjudicator that will direct the reversal of a transaction. When a transaction has been recorded, modification won’t be possible if the time of the commission of the transaction has passed an hour. This might dissuade some people, but it means that all transactions are safe, secure and transparent.
The emergence of Bitcoin has paved the way for the growth of other cryptocurrencies. Although this digital currency has been in existence for almost a decade, there is still confusion as to what it is all about. Hopefully, this has helped to shed more light.
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