Bitcoin is a type of money that exists in digital form and is transferred through the internet. Bitcoin is often referred to as cryptocurrency, digital currency, or alternative currency. In fact, it is the most popular type of cryptocurrency or internet-money.
What is cryptocurrency?
The term “cryptocurrency” is a hybrid from 2 words: cryptography & currency. Cryptography aims to provide security of information and communication and currency is a means to transfer and exchange value. Therefore, cryptocurrency is a medium of exchange of digital information that possesses value that utilizes cryptography. To protect data, cryptography uses encryption, the conversion of data into an unreadable format, giving security of transactions and control over the creation of the new units of exchange within the Bitcoin system.
Unlike traditional fiat currencies, cryptocurrencies are not bound geographically or legally to a specific country (although several governments of the world announced plans to create state cryptocurrencies, and Canada already did). Most cryptocurrencies are known for being decentralized, which means that they have no central authority regulating their ownership, issuance, value and circulation. Instead, they spread worldwide by means of a decentralized network of users. Cryptocurrencies are used as alternative payment methods as opposed to bank transfers and credit card stripes.
Bitcoin is the first cryptocurrency to have spread all over the world except for the places that don’t have the internet coverage. It was created in 2009 by Satoshi Nakamoto who published a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008 describing the functioning principles of Bitcoin.
The first decentralized cryptocurrency
The Bitcoin whitepaper was published on October 31, 2008. In the beginning. the paper didn’t receive much attention from the public except for a group of cryptography enthusiasts. In 2009, when the Bitcoin software and the open source code were released, the cryptocurrency started gaining global traction.
Bitcoin was designed with the idea of direct online payments from one person to another without a third-party, e.g. a bank or other financial institution, in mind. This topic was already addressed by earlier researchers like Wei Dai who described B-money, an anonymous distributed electronic cash system, back in 1998. This work, among others, was referenced in the Bitcoin whitepaper.
The concept of decentralization
Decentralization is one of the core Bitcoin features allowing transactions between two individuals directly avoiding a centralized clearance institution such as a bank. This feature allows individuals to transfer money much faster at a fraction of traditional transaction fees.
The previous cryptocurrency systems described or developed before Bitcoin were not viable because they didn’t provide a solution to the double-spending attacks that electronic payments were susceptible to. Any digital information including electronic money can be easily copied and reproduced, so an individual can attempt to send funds to two receivers simultaneously in a fraudulent manner. Having designed a verification system within Bitcoin, Satoshi Nakamoto provided a solution preventing double-spending.
What is blockchain?
Blockchain, a distributed ledger is the underlying technology at the core of Bitcoin. It records and verifies all Bitcoin transactions publicly. All Bitcoin transactions are arranged in the chronological order.
In the fiat system, transactions are verified by the bank. In the Bitcoin network, the open-source software performs the same function.
Bitcoin software is free to use and to download. It is available to anyone who has a computer with internet access.
There’s no central institution governing the Bitcoin network, the generation and distribution of the tokens, and its cost.
Bitcoin is designed in and for the world wide web where it belongs.
Bitcoin is susceptible to fluctuation because its value is defined by its popularity as a payment method, the trading volume, and the frequency of use. The market price of Bitcoin is constantly changing proportionately to the network activity governed by the code.
- Finite supply
There’s a fixed amount of Bitcoins that can ever be created, which means that its rate is predictable. There’s a total of 21M Bitcoins that will ever be created.
Geographical borders for a cryptocurrency like Bitcoin do not exist, it functions everywhere that internet access is available.
- Cheap transactions
Transaction fees within the Bitcoin network are minute, because the role of the intermediary verifying transactions in this process is occupied by the participants of the network named miners, who donate their computer power to sustain this process and are rewarded with transaction fees to compensate for the cost of electricity consumed for these calculations.
The Bitcoin code prevents the network from money-laundering, corruption, and double-spending that occurs in the traditional financial system.
Bitcoin account acquisition doesn’t require an individual to provide their ID or bank account details. Instead of names, the system utilizes public addresses consisting of letters and numbers to identify the sender and the receiver.
The Bitcoin system is highly transparent thanks to the blockchain technology that allows anyone to view the details of any transaction recorded on the public blockchain. If anyone if trying to forge this data, the entire network of users will be notified about it immediately.
Avoiding the clearance by the third-party and the utilization of the joined computational resources of the network saves a lot of time for transaction processing. The average Bitcoin transaction takes 10 minutes.
There’s no turning back once you’ve sent a Bitcoin transaction.
How are Bitcoins generated?
New Bitcoins are generated and come into circulation through the process named mining. Miners are the people who provide their computational resources to the network to solve mathematical puzzles, thus creating new Bitcoins.
Another important tool, without which Bitcoin would not have been so efficient, is the proof-of-work (POW) algorithm. This algorithm takes part in the verification process when the network’s computers solve mathematical puzzles and produce new coins. This process makes Bitcoin really unique and explains why it is called a decentralized cryptocurrency. There is no authority to produce new coins in the network (compared to monetary funds, printing notes in the traditional system). This function is accomplished by users, who “mine” new coins by verifying transactions of the others.
- The true identity of the Bitcoin inventor Satoshi Nakamoto is unknown to this day
- The total 21 million BTC will be issued by 2140
- The smallest fraction of Bitcoin is 0,00000001 (1 Satoshi)
- BTC is the acronym for Bitcoin
- There’s no intermediary between the sender and the recipient when a Bitcoin transaction takes place, therefore, Bitcoin transactions are peer-to-peer
It is impossible to put all the information about Bitcoin into one article, therefore we decided to share some links that will give you more information about the technology.
- What is Bitcoin?
- How Bitcoin Works in 5 Minutes
- Bitcoin Made Simple
- What is Bitcoin and how does it work?
- Bitcoin Explained
- The Rise and Rise of Bitcoin (2014)
- Life on Bitcoin (2014)
- Bitcoin: the End of Money (As We Know It) (2015)
- The Bitcoin Gospel (2015)
- Banking on Banking (2016)
- Mastering Bitcoin
- The Age of Cryptocurrency: How Bitcoin and the Blockchain are Challenging the Global Economic Order
- Digital Gold: Bitcoin and the Inside Story of Misfits and Millionaires Trying to Reinvent Money
- Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction
- Bitcoin: the Future of Money?