It has been around for almost a decade, it has reached incredible levels of hype and almost 20K $ in price and made the terms crypto-currency and blockchain famous. It is the brain child of the mysterious Satoshi Nakamoto and has gone from a cryptographic solution to the double spending problem when it comes to digital currencies to one of the highest traded speculative assets. So what exactly is it and how does it work?
What it is
In 2009 Bitcoin was released to the world as an open-source software and the first cryptocurrency, a digital currency that exists only electronically. On top of that it is decentralized and is not controlled or issued by a central authority (bank or government) when it comes to how much Bitcoin is in circulation.
How and when new Bitcoin is created is handled by the blockchain programming instead, which also keeps track of accuracy for every transaction and where each Bitcoin is. The total supply is capped at 21 million Bitcoins which might not sound like a lot but at the same time, Bitcoin can be divided “infinitely” so transactions of 0.00000001 Bitcoin are possible without creating a scaling issue. All this places Bitcoin as a currency that cannot be inflated, as common control currencies often are.
How it works
Bitcoin uses a network of volunteers, the ones better known as miners, to ensure the verification process of every transaction. After a specific amount of transactions is complete a new block is added in the blockchain. The miners’ job is to solve a mathematical problem and whoever solves it first adds the verified block of transaction to the blockchain. The calculations done for this are based on Proof of Work and the reward for it of course is in Bitcoins for each new block of verified transaction, currently about 12.5 bitcoins. The underlying technology is quite complex but a real-world transaction can be simple as just using a credit card, you make a payment or transfer using your bitcoin wallet to another wallet’s address (also called a cryptographic hash, a string of 34 letters and numbers), the transaction is sent to the network of bitcoin miners for confirmation and when it is confirmed bitcoin is successfully transferred and the transaction is complete.
As you would use a wallet to store your currency or a pocket or an account you also need to store your bitcoin somewhere. Here is where bitcoin wallets come in handy. There are different options but mainly two categories of wallets: online and offline. They use two keys that give access to your funds a public cryptographic key which represents your account number and can be used if you want to receive payments and the private cryptographic key which enables you to spend your funds and you should keep safe at all times for obvious reasons. Online wallets on crypto-exchanges have a history of hacking so even though blockchain’s structure makes hacking extremely difficult an offline wallet is the safest way of keeping your Bitcoin.
Pros and Cons
People often refer to Bitcoin as the currency of the future and it sure has advantages and disadvantages.
- Being decentralized means it cannot be corrupted and controlled the way the current financial system is.
- You can carry your funds anywhere and pay anytime without bank delays.
- No need for extended personal information and encryption adds a layer of extra security
- Transaction fees are far lower than bank or money companies’ fees.
- The Blockchain is a public ledger that is objective and fair since it is based on mathematics and cannot be affected by human error or corruption.
- No legal framework/regulation yet has resulted in banning or restricting transactions in some areas of the world and in some cases bitcoin has been criminalized
- Exchanges are not 100% secure as mentioned with a history of hacks and lost funds.
- Liquidity is still a problem until greater adoption of bitcoin is achieved and volatility will also stabilize. As bitcoin is relatively still young it will take more time to become more user friendly and more widely adopted.