A beginner's guide to bitcoin
Bitcoin is a digital currency
that is being used increasingly all over the world.
Find out more about how it works
and how you can use it with our straightforward guides.
What is bitcoin?
Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by lots of people running computers all around the world, using software that solves mathematical problems. It’s the first example of a growing category of money known as cryptocurrency.
Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by lots of people running computers all around the world, using software that solves mathematical problems. It’s the first example of a growing category of money known as cryptocurrency.
What makes it different from
normal currencies?
Bitcoin can be used to buy things
electronically. In that sense, it’s like conventional dollars, euros, or yen,
which are also traded digitally.
However, bitcoin’s most important
characteristic, and the thing that makes it different to conventional money, is
that it is decentralized. No single institution controls the bitcoin network.
This puts some people at ease, because it means that a large bank can’t control
their money.
Who created it?
A software developer called
Satoshi Nakamoto proposed bitcoin, which was an electronic payment system based
on mathematical proof. The idea was to produce a currency independent of any
central authority, transferable electronically, more or less instantly, with
very low transaction fees.
Who prints it?
No one. This currency isn’t
physically printed in the shadows by a central bank, unaccountable to the
population, and making its own rules. Those banks can simply produce more money
to cover the national debt, thus devaluing their currency.
Instead, bitcoin is created
digitally, by a community of people that anyone can join. Bitcoins are ‘mined’,
using computing power in a distributed network. This network also processes
transactions made with the virtual currency, effectively making bitcoin its own
payment network.
So you can’t churn out unlimited
bitcoins?
That’s right. The Bitcoin
protocol – the rules that make bitcoin work – say that only 21 million bitcoins
can ever be created by miners. However, these coins can be divided into smaller
parts (the smallest divisible amount is one hundred millionth of a bitcoin and
is called a ‘Satoshi’, after the founder of bitcoin).
What is it based on?
Bitcoin is backed by maths
Conventional currency has been
based on gold or silver. Theoretically, you knew that if you handed over a
dollar at the bank, you could get some gold back (although this didn’t actually
work in practice). But bitcoin isn’t based on gold; it’s based on mathematics.
Around the world, people are using
software programs that follow a mathematical formula to produce bitcoins. The
mathematical formula is freely available, so that anyone can check it. The
software is also open source, meaning that anyone can look at it to make sure
that it does what it is supposed to.
What are its characteristics?
Bitcoin has several important
features that set it apart from normal fiat currencies.
1. It’s decentralized
The bitcoin network isn’t
controlled by one central authority. Every machine that mines bitcoin and
processes transactions makes up a part of the network, and the machines work
together. That means that, in theory, one central authority can’t tinker with
monetary policy and cause a meltdown – or simply decide to take people’s
bitcoins away from them, as the Central European Bank decided to do in Cyprus
in early 2013. And if some part of the network goes offline for some reason,
the money keeps on flowing.
2. It’s easy to set up
Conventional banks make you jump
through hoops simply to open a bank account. Setting up merchant accounts for
payment is another Kafkaesque task, beset by bureaucracy. However, you can set
up a bitcoin address in seconds, no questions asked, and with no fees payable.
3. It’s anonymous
Well, kind of. Users can hold
multiple bitcoin addresses, and they aren’t linked to names, addresses, or
other personally identifying information. However…
4. It’s completely transparent
…bitcoin stores details of every
single transaction that ever happened in the network in a huge version of a
general ledger, called the block chain. The block chain tells all. If you have
a publicly used bitcoin address, anyone can tell how many bitcoins are stored
at that address. They just don’t know that it’s yours. There are measures that
people can take to make their activities more opaque on the bitcoin network,
though, such as not using the same bitcoin addresses consistently, and not
transferring lots of bitcoin to a single address.
5. Transaction fees are miniscule
Your bank may charge you a £10
fee for international transfers. Bitcoin doesn’t.
6. It’s fast
You can send money anywhere and
it will arrive minutes later, as soon as the bitcoin network processes the
payment.
7. It’s non-repudiable
When your bitcoins are sent,
there’s no getting them back, unless the recipient returns them to you. They’re
gone forever.
Source: www.coindesk.com
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