What is Bitcoin?
Bitcoin is a form of digital currency that can be described as a transaction ledger created and held electronically. As a decentralized network, no one controls the Bitcoin, and the ledger is kept by the whole network at all times.
Bitcoins aren’t printed, like dollars or euros – they’re “given” as a reward by the network to people, and increasingly to businesses, running computers all around the world, using software that solves mathematical problems and operates the decentralized network.
It’s the first example of a growing branch of money known as cryptocurrency.
What makes Bitcoin different?
Bitcoin can be used to buy products and services online and in physical stores. In that sense, it’s just like dollars, euros, or yen, which are also traded digitally.
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However, Bitcoin’s most distinguished characteristic, which distinguishes it from conventional money, is that it is decentralized. No third-party or institution controls the Bitcoin network. This eliminates the need to trust any committee or company to control and monitor the Bitcoin network. It also means no one can “print” as many Bitcoins as they want, as banks do today.
Furthermore, all Bitcoin transactions are transparent to anyone.
Who created it?
In the days of the 2008 financial crisis, a software developer called Satoshi Nakamoto was looking for a decentralized solution for money. Satoshi ultimately proposed Bitcoin, 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.
So how do Bitcoins come to the world?
Unlike conventional banks, which can simply produce more money to cover the national debt, thus devaluing their currency and creating inflation, Bitcoin isn’t physically printed. Instead, Bitcoin is created digitally by a community of people that anyone can join. Bitcoins are “mined,” using computing power in a distributed network.
This network also processes transactions made with the virtual currency, effectively making Bitcoin its own payment network.
So you can’t churn out unlimited Bitcoins?
That’s right. The Bitcoin protocol – the rules that make Bitcoin work – say that only 21 million Bitcoins can ever be created by miners. However, these coins can be divided into smaller parts (the smallest divisible amount is one hundred millionth of a Bitcoin and is called a ‘”Satoshi,” after the founder of Bitcoin).
What is Bitcoin based on?
Conventional currency is based on gold or silver. Theoretically, you knew that if you handed over a dollar at the bank, you could get some gold back (although this didn’t actually work in practice). But Bitcoin isn’t based on gold; it’s based on mathematics and a lack of need to trust.
Around the world, people are using software programs that follow a mathematical formula to operate the Bitcoin network and be rewarded with Bitcoins.
The software is also open source, meaning that anyone can look at it to make sure that it does what it is supposed to.
What are its characteristics?
Bitcoin has several important features that set it apart from government-backed currencies.
1. No one controls it.
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 no central authority can play around 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. If some part of the network goes offline for any reason, the money keeps on flowing.
2. It’s easy to set up.
Conventional banks can make it hard to even simply open a bank account. Setting up merchant accounts for payment is an even harder 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 completely transparent.
The details of each and every transaction ever conducted in the network is kept 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.
4. Transaction fees are miniscule.
Your bank may charge you a $15 transaction fee for a wire. Bitcoin won’t.
5. It’s fast.
You can send money anywhere and it will arrive minutes later, as soon as the Bitcoin network processes the payment.