Bitcoin is a new type of currency that has been attracting a lot of attention from a lot of different people. Its origins are complex and somewhat mysterious. People who know about Bitcoin tend to be either fanatical supporters or derisive opponents. In this post, we will explore what Bitcoin is and learn about what has made it such a curiosity for everyone from banks and governments to ordinary citizens.
The original developer of Bitcoin is still unknown. A person or group of people calling themselves Satoshi Nakamoto published the first paper that discussed the design of Bitcoin in 2008 and released the final version of the code underlying Bitcoin in 2009. This entity has since faded from prominence, and to this day nobody knows who or what Satoshi Nakamoto is.
Bitcoin itself is an innovative approach to currency. It is entirely digital- there are no physical Bitcoins. No government has an authoritative control of Bitcoin. Instead, every user of Bitcoin has a stake in control of the currency. Here is how it works. Every Bitcoin transaction is public, recorded in a ledger called the “blockchain”. To verify a Bitcoin transaction, the computers of the two or more people making the transaction both access the blockchain and change the amount of Bitcoins in the virtual wallets of the person purchasing a good or service with Bitcoins. Every Bitcoin transaction is protected by complex encryption, so that it is essentially impossible to fake a Bitcoin transaction.
In addition to buying and selling things with Bitcoin, it’s also possible to create new Bitcoins. The blockchain is essentially a long puzzle for computers to solve. Solving “blocks” in the chain both verifies transactions for everyone who uses the currency and entitles the person who solved the block to some Bitcoins. This process is called “Bitcoin mining.” To prevent this process from creating a flood of Bitcoins, the difficulty of the puzzles is constantly increasing. People now use “Bitcoin mining rigs”, which are special computers designed to solve blocks, in order to obtain Bitcoins for themselves.
The main benefit of Bitcoin is that the control over the currency is decentralized. That is also its biggest downfall- there is no authority to give Bitcoin value. The US dollar has value because it is backed by the American government: the same goes for the euro and the governments of EU member states. With Bitcoin, there isn’t a government or bank backing it up. While this leaves the currency free from control by an authority, it also means that its value in terms of other currencies, like the dollar, tends to fluctuate.
In addition, the fact that Bitcoin is not backed by an authority means that there are not many companies that accept Bitcoin as a valid payment method. This is a complex problem, because it is also not straightforward to convert Bitcoins into dollars or other currency. Trading Bitcoins takes place on Bitcoin exchanges, but these have been plagued by hacks or scams. It is not easy to take a wallet of Bitcoins and convert them to a physical currency, which is a problem for businesses who need dollars to pay taxes, pay workers, purchase inventory, and carry out other operational tasks. If they have a stock of Bitcoin, they can use it to purchase items from other Bitcoin merchants, but that won’t help them run their business.
There is another side to Bitcoin. The fact that it exists outside of legal authority makes it essentially untraceable. That opens the door to unscrupulous agents using it to trade drugs and weapons. The FBI shut down a massive underground Bitcoin business that sold drugs called the Silk Road recently, but undoubtedly more drug clearinghouses exist. This hurts the reputation of Bitcoin among legitimate users.
Bitcoin’s growing popularity shows that some people are still attracted to the idea of the digital currency despite the setbacks. While it hasn’t yet reached mainstream acceptance, that could be in the currency’s future. For now, it remains the territory of drug lords and enthusiasts.