In order to get past some of the confusion surrounding bitcoin, we first need to separate it into its two components. When it comes to bitcoin you have the bitcoin-the-protocol, a disrupted network that manages and maintain a record of balances of the bitcoin token, and you also have the actual bitcoin-the-token, which is a snippet of code that represents a digital concept. Think of it as a virtual IOU. Both of these are referred to as bitcoin.
The bitcoin system allows you to make payments between you and other users without the need to pass through a central security system like a payment gateway or bank. It’s all held and created electronically. You won’t find printed bitcoins, it’s all digital not like Pounds, Dollars or Euros, you will, however, find them been produced by computers all around the world, all with the use of free software.
Bitcoin was the first example of what we know today as cryptocurrencies. A growing asset class, cryptocurrencies share some characteristics with traditional currencies, but they also have the additional verification based on cryptography.
Who Created Bitcoin?
Going by the name Satoshi Nakamoto, a pseudonymous software developer proposed bitcoin in 2008. It was an electronic payment system that was entirely based on a mathematical problem. The initial idea was to produce a means of exchange that was completely independent of any central authority but could still be transferred electronically in a verifiable and secure way. Satoshi Nakamoto has stayed anonymous still to this day, with no one knowing who he/she/they really are.
What makes Bitcoin different from our traditional currencies?
Bitcoin’s sole purpose is to be used as an electronic payment, there is no printed format. Both parties need to be willing to make an exchange in this way for it to be used. In some sense, it’s very similar to paying with other currencies in a digital way.
However, Bitcoin does differ from other currencies in some significant ways, let’s have a look below:
There’s A Limited Supply
Currencies like pounds, dollars, yen, etc., are known as fiat currencies, and are in unlimited supply. Central banks have the power and control to issues as many as they want or need to. They can also attempt to manipulate a particular currency value relative to others. This is often referred to as the rate of exchange when converting one currency to another. This is when someone who holds a lot of this type of currency risk losing money, in big chunks at times.
However, the supply of bitcoin is very tightly controlled by the underwritten algorithm. There is only a small number of bitcoins that are released out every hour, and they will continue like this until 21 million has been reached. This makes bitcoin much more attractive as an asset, in theory, if the demand grows the supply is going to stay the same so the value should increase.
Decentralization
One of bitcoin’s most important characteristics is that it is decentralized. There isn’t just one single institution controlling the network. It’ managed and maintained by a group of voluntary coders, and it’s run by an open network of computers dedicated to the tasks, spread across the globe. This makes it very attractive for groups and individuals that would prefer to stay away from the control that the bank or government institutions have with their money.
This attracts individuals and groups that are uncomfortable with the control that banks or government institutions have over their money. Digital assets can very easily be copied and reused, bitcoin, however, prevent the double-spending problem through the use of cryptography and economic incentives. With, electronic fiat currencies, this function is taken care of by banks, giving them control over the traditional system. With bitcoin, all transactions are maintained and distributed through an open network and owned by no one to withholding its integrity.
Pseudonymity
In order to comply with anti-money laundering, verification, and other legislation, senders using traditional electronic systems are usually identified. Users of bitcoin can, in theory, operate in semi-anonymity. There is no central validator, therefore there is no requirement for a user to identify themselves when sending or receiving funds to and from another user.
When there is a request for a transaction, the protocol is to check previous transactions to confirm that the sender has the bitcoin they need as well as the permission to send them. The system has no need for any proof of identity. Each user is therefore identified by his or her wallet. This means that with some effort it’s possible to track these payments. Law enforcement has developed method of identifying users if it’s needed.
As well as that, it’s the law that an identity check needs to be performed on the customer when buying and selling anything for bitcoin. This is another way that bitcoin can be tracked. The bitcoin network is transparent, this means that the process and all the steps of any transaction are visible to all. This is positive for bitcoin as it means that it’s not the ideal currency for criminals, money-launders or terrorists.
Immutability
Unlike fiat transactions, bitcoin transactions cannot be reversed. There is no central adjudicator that gives the go-ahead for a refund of money. This means that any transactions that are recorded on the bitcoin network are impossible to modify once more than an hour has passed. While this might not make some people feel comfortable, you should be resting easy that any transaction you make on the bitcoin network can’t be tampered with in any way, making it very secure.
Divisibility
One hundred millionth of a bitcoin is referred to as a satoshi (0.00000001), the smallest bitcoin that is available. It works out to be about one-hundredth of a cent. This means that using bitcoin could enable you to make microtransactions that traditional electronic money cannot.
The above information should help you to gather a much better understanding of bitcoin and how you could make use of it.