What is Bitcoin?
Bitcoin is a digital currency that exists entirely over the internet. It’s the most well-known virtual currency in the world today – although most people don’t really understand how it works.
To a layman, Bitcoin is best described as anonymous internet money. It’s based on a decentralized peer-to-peer payment network. You send digital money to someone for products or services.
Who Created Bitcoin?
The idea of cryptocurrency has existed for a long time. The roots of Bitcoin can be traced way back to 1998, when the term “cryptocurrency” was used for the very first time by Wei Dai on an online mailing list. This futuristic currency was proposed to be a new form of money fueled by the internet that would use cryptography to govern its creations and transactions – two things that are typically governed by a central authority in most modern currencies.
The creation of Bitcoin itself, however, is traced back to a man named Satoshi Nakamoto. Satoshi published the first proof of concept for Bitcoin in 2009 in a cryptography mailing list. Satoshi’s involvement with Bitcoin ended in 2010, at which point the currency’s development was undertaken by many developers around the world.
Satoshi is one of the most mysterious parts about Bitcoin. The man himself has never been identified. It’s unknown if Satoshi Nakamoto even is a man. The Wikipedia page on Nakamoto claims that “Satoshi Nakamoto is a person or group of people who created the Bitcoin protocol.”
In any case, Satoshi’s anonymity doesn’t mean much today. The Bitcoin software is entirely open and available for anyone to review: it’s not some hidden scheme created by an evil genius. As a result, Bitcoin.org claims that “the identity of Bitcoin’s inventor is probably as relevant today as the identity of the person who invented paper.”
How Does Bitcoin Work?
Most people can tell you that Bitcoin is a digital cryptocurrency – even if they don’t use those exact terms.
But when you start asking these people about how Bitcoin works, they might start to get quiet. So how exactly does Bitcoin work?
From your perspective as an average Bitcoin user, Bitcoin is just a mobile app or computer software program. You manage your Bitcoin wallet using this software and can send and receive Bitcoins with the software. For most users, your extent of knowledge about how Bitcoin works can safely end there.
But there’s plenty more information about Bitcoin behind the scenes. Behind the scenes, the Bitcoin network shares a public ledger called the block chain. This block chain lists every single Bitcoin transaction ever processed. Each user’s computer/app can verify the validity of each transaction. All Bitcoin transactions are protected by digital signatures that correspond to the sending addresses.
If you have specialized computer hardware, you can actually use your processing power to help process Bitcoin transactions. This is called “mining” and users are rewarded in Bitcoins for their processing power. We’ll comprehensively cover Bitcoin mining in another article.
How Do You Send and Receive Payments with Bitcoin?
All Bitcoin users have an address. This address typically looks something like this:
That may look like gibberish, but it’s a unique identifying code of 26 to 35 alphanumeric characters. The address always begin with the number 1 or 3.
Getting a new Bitcoin address is easy. Using Bitcoin software, you typically just click the “New Address” button.
You can send Bitcoins by typing in that person’s address. You can also tap phones together to exchange addresses using NFC technology in your smartphone. Or, some users simply scan a QR code.
Advantages of Bitcoin
Total Freedom: Bitcoin isn’t locked into any country, any hours, or any markets. It’s a currency free from any national restrictions. You can send and receive an unlimited amount of money to and from anywhere in the world at any time of the day. You don’t have to be restricted by banking holidays. You can enjoy complete control of your money.
Better Security: Bitcoin payments can be made with no personal information attached to the transaction. This is why Bitcoin is popular with privacy advocates and criminals alike. Bitcoin users are also in complete control of their transactions because merchants cannot add fees at the point of purchase.
Minimal Transaction Fees: Most Bitcoin transactions have no fees. If fees are incurred, they’re typically extremely small – like the small fee used for transactions to receive priority processing. Compared to credit card networks and online payment platforms like PayPal, Bitcoin’s fees are miniscule.
Transparent and Neutral Currency: When you own most of your wealth in US dollars, your financial security is inexorably linked to the success of the American economy and decisions of the American government. Bitcoin isn’t tied to anything. All information about Bitcoin is readily available online. Average people can look at the block chain to verify its authenticity in real time. No organization can control or manipulate Bitcoin due to its cryptographic security. No other currency in the world can claim to be this neutral, transparent, and predictable.
Disadvantages of Bitcoin
It’s Not Available Everywhere: Most people have heard of Bitcoin today. But most people don’t own a Bitcoin wallet. You can’t walk into a McDonald’s and pay for your Big Mac meal with a fraction of a Bitcoin. Of course, Bitcoin is still in its very early days, so we can expect acceptance to grow. But still, at this point, it’s a big hurdle to cross.
Volatility: Bitcoin isn’t backed by any concrete asset. Therein lies its most fundamental value – neutrality – and its fundamental weakness – volatility. Today, Bitcoin hovers around $300 to $400. In the past, it has hit highs of $1100+.
Where Will Bitcoin Go in the Future?
The Bitcoin project is currently ongoing and it’s unknown where the technology will go from here. What we do know about the future of Bitcoin is that only 21 million Bitcoins will ever be created.
Nevertheless, that won’t really limit the currency: it just means that future transactions will be split into fractional denominations of Bitcoins. You can divide a single Bitcoin up to 8 decimal places (0.00000001 Bitcoins) using the current system.
Other than that, we also know that Bitcoin will always be governed by two important things: supply and demand.