What Is Bitcoin?
Bitcoin is the world’s first decentralized currency. As a peer-to-peer digital payment system, it allows users to exchange money without paying a transaction fee. Unlike other currencies, bitcoins aren’t issued or regulated by governments or banks.
There’s a strong emphasis on anonymity, which is fitting, given Bitcoin’s mysterious origins. In 2008, a person (or group of people) called Satoshi Nakamoto published a paper on an alternative cryptocurrency that could circumvent all existing financial institutions. In 2009, Nakamoto released the first Bitcoin software.
Since its launch, Bitcoin has generated a tremendous amount of controversy related to its potential impact on global finance. Bitcoin users can now purchase things in the real world (some legal, others illicit), receive online payments, and speculate on the Bitcoin market itself.
To understand how the system works, you first need to understand some of the lingo:
Though they can be used for real-world transactions, bitcoins are immaterial. They exist only as software code.
Bitcoins are produced through a process called “mining." All over the world, powerful computers are solving increasingly complex mathematical problems. (These problems are actually encryption challenges used to secure bitcoins, and by solving them, “miners" are boosting the security of the system.) Each solution automatically generates a random yield of bitcoins, which the miners keep as a reward.
Like any precious metal, scarcity is what makes bitcoins valuable. But unlike paper currency, there’s a finite number of bitcoins. Once 21 million bitcoins have been generated, that’s it — no more bitcoins. However, each bitcoin can be divided up into smaller subunits, such as millibitcoins (0.001 bitcoin).
A Bitcoin Wallet is software that allows users to store and exchange currency based on individual digital addresses. To prevent unfair manipulation, every exchange between wallets is 100 percent unique.
While other currencies might be backed by a commodity (such as gold), bitcoins are backed by an algorithm. Because there’s no centralized regulatory body, there is no fixed value or exchange rate for Bitcoin. When a Bitcoin transaction occurs, the buyer and seller agree on a price based on the going rate for bitcoins elsewhere.
Unlike most digital financial transactions, Bitcoin exchanges carry no enforced fees. There are no banks or credit card companies acting as gatekeepers. However, users can choose to pay voluntary fees to sustain the growth of the network and expedite transactions.