What is Bitcoin?

Bitcoin is a new type of currency known as a digital currency. Unlike banknotes or regular coins, Bitcoins are not printed or minted. Neither is it controlled by any central authority like a reserve bank of a country. Bitcoins exist in cyberspace where it is produced and exchanged. You can use it to buy services and products or these days even convert into cash in your local currency through a Bitcoin exchange.

bitcoin

Difference from regular currency

The amount of currency released into circulation by a country’s reserve bank is dependent on many factors. Sometimes it is linked to the amount of gold in a reserve bank’s possession. Other times it is linked to the size of a country’s economy. These days, most currencies are determined by a several complex factors. It is not only the amount of money that is in distribution which is controlled but also the value of a currency.

Bitcoin works differently. Its value is not directly linked to any specific country, its economy or its stores of precious metals like gold. Instead the amount of Bitcoins in circulation are consistently increased electronically through a network of connected computers. The amount of Bitcoins will eventually  reach a maximum level and not exceed it, unlike with conventional currency these days where more money is just printed.

The value of a Bitcoin is also largely independent of the factors that determine the value of real currencies. Bitcoins are not controlled by any central authority. By being decentralized in this way, the value cannot be easily manipulated by a single person or organization. Furthermore Bitcoins are not owned by any country. So any person living anywhere in the world can own Bitcoins and use it to make purchases.

Who created Bitcoins and Why?

The Bitcoin system was created by Satoshi Nakamoto. Nobody knows who he is. He may not even be a male or of Japanese descent like his name suggests. Satoshi Nakamoto could even be a group of people or organisation. The Bitcoin system was first discussed in a paper on an electronic cash system that made its appearance in 2008. By 2009, the early Bitcoin system was launched.

Many hypothesize about why the Bitcoin system was created. The founder claims that the purpose is to develop an electronic cash system for transacting online that is independent of any real currency system. It was also meant to allow for low transactional costs and for the ease of use across the globe. However, these days it has become somewhat of an investment vehicle as people buy and sell Bitcoins to capitalize on its rising value.

How the Bitcoin system works?

Bitcoins are not controlled by any third party agency. It instead exists in cyberspace on the computers of all people who are involved in the system. This makes it relatively impervious to manipulation. You need a Bitcoin wallet to hold and transact with Bitcoins and you can only use it at merchants who accept it as a form of currency.

Bitcoin is a cryptocurrency. It is a complex mathematical puzzle that regulates the system to ensure that it cannot be defrauded. New Bitcoins can be produced by ‘mining’. Here a computer must solve complex mathematical problems for a new Bitcoin to be produced. These mathematical problems known as hash puzzles also serve as a regulatory mechanism where every user is essentially part of a public ledger that tracks the Bitcoin system.

Anybody can accept Bitcoins as a form of payment or use it to pay people or merchants who accept Bitcoins. A Bitcoin exchange is a provider that can covert Bitcoins into cash in your currency of choice. The value of a Bitcoin fluctuates greatly at times since there is no central authority to regulate it. The value has risen from the equivalent of $0.32 in 2010 to over $1,000 in late 2013.

Nobody knows just how much the Bitcoin will be worth in the future but recent events, and acceptance of the system by certain national authorities, has made Bitcoin into a more legitimate alternative currency system.

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