A Guide on Understanding Bitcoin
What Is It?
A Bitcoin is digital form of currency. The central idea of a Bitcoin is that it is created and transacted using cryptography instead of being issued by a central bank. The Bitcoin started the year with a value of about $15. Four months later a Bitcoin trades above $70—a value higher than the Euro.
Bitcoin—a global, decentralized virtual currency—first appeared in 2009 thanks to its creator, Satoshi Nakamoto. It operates on a vast P2P network which is currently comprised of thousands of systems. Its goal is quite ambitious: to solve many of the issues with currency today, such as providing near-cash anonymity with online transactions, governments being able to create their own money whenever they want, transfer fees associated with transactions, and more. No banks, no fees, and no traces. As opposed to a currency a Bitcoin operates more like a commodity.
How is it created?
Unlike traditional currency bitcoins are no created in a mint. Rather they are created by computers using a process called Mining. This process involves the solution of complex mathematical problems. You are rewarded with a bitcoin after a solution is found. These problems are by no means easy to solve and if attempted by your average computer will take years to solve even a single one resulting in only a single bitcoin. The goal behind this is to reduce the creation the creation of unnecessary bitcoins and make them a prized possession. To maintain its prized value only 21 million bitcoins will ever be created. Computers with fast and dedicated processors have been set up for the sole purpose of mining bitcoins.
Bitcoins can be exchanged in a number of ways. Bitcoins have a currency exchange rate but their value is very subjective because of fluctuating market conditions. You can decide how you want to use your bitcoins. You can trade products, services, and information in return for bitcoins. Some organizations even use bitcoins to accept donations rather than PayPal or other poplar platforms. As bitcoins have a monetary value associated with them there are exchange markets where you can sell your bitcoins for cash.
Cause for Concerns?
The principal of bitcoin Gavin Andresen was asked to give a presentation to the CIA about bitcoin. This shows that governments are particularly wary of this new form of currency. But why is that? By itself the bitcoin network is completely anonymous. There is no central location that provides or stores funds. Money is exchanged between peers using public hashes, not names. The only way to track a bitcoin purchase is if a person uses bitcoins to but stuff on the Internet and then has it delivered to his/her physical address. So can bitcoin harm a country's economy? The answer to this question is unclear at the moment as it depends on the integrity of the bitcoin ecosystem. And the fact that there can only be so many bitcoins also leads us to think that it will never be a true alternative to traditional currency at least in the near future.