Bitcoin is a digital currency that is created and held electronically. The most important thing to know is that no one controls it. Bitcoins are not a printed currency like dollars and euros, but produced by people and running computers all around the world. In order to create it, people use software that solves mathematical problems. This worldwide, fast growing business is actually the first example of a category of money known as cryptocurrency.
Compared to normal currencies
Bitcoins can be used to buy items electronically, meaning that it is just like dollars, euros and yen, which are traded digitally as well. However, the most important characteristic of this cryptocurrency, and the thing that makes it different to “normal” currencies, is that bitcoin is decentralized. There is no institution in the world that controls the bitcoin network. The number of bitcoin holders and the overall popularity is constantly increasing because there is not a single large bank that can control people’s money.
Creating and printing
A software developer Satoshi Nakamoto proposed the use of a bitcoin at the very beginning, in a form of the electronic payment system that is based on mathematical proof. The aim was to create a currency that is independent of any central authority, easily transferable electronically, with very low transaction fees.
No one prints bitcoins. This cryptocurrency is not physically printed like dollars in a central bank. Instead, bitcoin is produced digitally, by a community of people that welcomes anyone who is willing to join. Bitcoins are actually “mined” by using computing power in a distributed network. This network also processes all transactions that are made with the virtual currency, making bitcoin its own payment network.
You’re asking yourself if you can’t churn out unlimited bitcoins? The answer is “Yes, that’s right”. The rules that make bitcoin work, called “the bitcoin protocol”, claim that only 21 million bitcoins can be created by miners. So yes, there is a limit. However, these coins can be divided into smaller parts. The smallest divisible amount of one bitcoin is one hundred millionth of a bitcoin, called a “Satoshi”, after the founder of this cryptocurrency.
Is bitcoin based on something?
Conventional currencies like dollars and euros are mainly based on gold or silver. In theory, you could hand over one dollar at the bank and to expect to get some gold back, but it didn’t actually work in practice. However, bitcoin is not based on gold, but on mathematics. It means that people around the world use software programs that rely on a mathematical formula to produce bitcoins. This mathematical formula is available for free, so anyone can check how it works. This software is also open source, which means that anyone can check it out and see if it does exactly what it is supposed to do.
Bitcoin has several important characteristics that make it quite different from all government-backed currencies.
The bitcoin network is not controlled by any central authority and every machine that mines bitcoin and processes transactions is a part of the huge network, where the machines work together. It means that one central authority cannot make changes in the monetary policy and cause a meltdown. The central authority cannot decide to take people’s bitcoins away from them, just like the Central European Bank did in Cyprus in 2013. In case of some part of the network going offline, the money still keeps on flowing.
Easy to set up
Conventional banks make the opening of a bank account quite difficult for customers, involving them into the madness of bureaucratic processes. However, setting up a bitcoin address can be done in seconds, without any questions asked or payable fees.
It can be said that it is kind of anonymous. Users can have multiple bitcoin addresses that are not linked to names, addresses, or any other personally identifying information.
Even if it is kind of anonymous, bitcoin still stores details of every single transaction in the network. It is a huge version of a general ledger, called the “blockchain”. If someone has publicly used the bitcoin address, it is not hard to know how many bitcoins are stored at the very same address. It’s just not clear who is in charge of that address.
Most banks may charge customers up to £10 for international transfers. Bitcoin network doesn’t have this fee.
Money can be sent anywhere and it can be expected to arrive in just several minutes. Money is transfered as soon as the bitcoin network processes the payment.
When the bitcoins are sent, there’s no way to get them back, unless the recipient returns them willingly. Users must think carefully before sending any amount of bitcoins to someone else.