Bitcoin is a currency that is created and held electronically. It is the first example of cryptocurrency.
A cryptocurrency is a digital currency where encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds without a central bank. What is a bitcoin? Bitcoin is decentralised, which means that no single authority or institution holds or controls the bitcoins. Regular currency is controlled by one governing authority such as a central bank. If the country requires more money it can print more money but that devalues the currency and leads to inflation. Bitcoins can be transferred electronically and practically instantly and have historically had low transaction fees, though this is something that has recently changed. Mashable.com reported that Bitcoin transaction fees have soared of late, thanks to a block in the Bitcoin blockchain, which is limiting the number of transactions that can go through at any given time.
How are bitcoins created? Only 21 million bitcoins can ever be created in order to protect the value of the bitcoin system. Bitcoins can be ‘mined’, which is the process of actually creating bitcoins, or they can be bought using regular currency. Bitcoins can be mined using computer software and a mathematical formula designed by the Bitcoin founder Satoshi Nakamoto. Satoshi Nakamoto is anonymous and could be one person or a group of software developers.
Some people have claimed to be the Bitcoin founder but to date, the Bitcoin inventor’s identity remains anonymous. Bitcoins are created digitally by a community of people that anyone can join. Each machine that mines bitcoins makes up part of the network and each machine works together.
Bitcoins are made or ‘mined’ by computer power on the bitcoin network. Miners use the computer software to follow the mathematical formula to produce bitcoins. The mathematical formula is freely available for anyone to check and the software used is open source, meaning anyone can check it. Bitcoins are not based on gold or federal reserves but on mathematics. Bitcoins are created as a reward for mining, they can be exchanged for other currencies, products or services. They are used to purchase goods or services on the digital black market.
How do bitcoins work? There are certain rules governing the creation of bitcoins; miners cannot just keep producing bitcoins as they please. Because only 21 million bitcoins can ever be produced by miners, the value of the system is preserved and the value of the bitcoins fluctuates wildly, depending on supply and demand. the bitcoins can then be divided into smaller parts. Bitcoins can then be divided into smaller parts – you do not have to buy an entire bitcoin. The smallest divisible bitcoin amount is one hundred millionth and is called a Satoshi after the founder of bitcoin. Bitcoin transactions are sent to and from Bitcoin wallets, which is where your bitcoins are stored electronically. Bitcoin transactions are completely transparent, any bitcoin transaction can be traced back to the point where the bitcoins were produced. The ‘the block chain’ is a public ledger where every bitcoin transaction that ever took place is noted.
However bitcoin is completely anonymous as bitcoin addresses are not linked to names, addresses or other personally identifying information and any one user can hold multiple bitcoin addresses. Anyone can see how many bitcoins are held at a certain address but they don’t know who the address belongs to. Once you have made a transaction using bitcoins there is no way to get them back unless the recipient returns them. Each transaction has three pieces of information attached: An input (bitcoin address that sent the bitcoins), an amount (amount of bitcoins being sent) and an output (the recipient’s bitcoin address).