Bitcoin (BTC) is a digital currency first described in a 2008 paper by pseudonymous developer Satoshi Nakamoto, who called it a peer-to-peer, electronic cash system. Bitcoin creation and transfer is based on an open source cryptographic protocol and is not managed by any central authority. Each bitcoin is subdivided down to eight decimal places, forming 100 million smaller units called satoshis. Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution.
The processing of bitcoin transactions is secured by servers called Bitcoin miners. These servers communicate over an internet-based network and confirm transactions by adding them to a ledger which is updated and archived periodically. In addition to archiving transactions each new ledger update creates some newly-minted bitcoins. The number of new bitcoins created in each update is halved every 4 years until the year 2140 when this number will round down to zero. At that time no more bitcoins will be added into circulation and the total number of bitcoins will have reached a maximum of 21 million bitcoins. Bitcoin is accepted in trade by merchants and individuals in many parts of the world. Similar to other currencies, illicit drug and gambling transactions constitute some of its commercial usage. Although Bitcoin is promoted as a digital currency, many commentators have criticized Bitcoin's volatile exchange rate, relatively inflexible supply, and minimal use in trade.
Bitcoins share many similarities with other currencies, but the most
important one is that more and more merchants, retailers and
individuals, both online and offline, accept bitcoins as payment. You
can buy pizza with bitcoins, subscribe to an online dating service, or
even shop at your favorite superstore.
Yet bitcoins are also very
different from traditional currencies. Unlike dollars or pounds,
bitcoins aren't backed by any government. They're a completely decentralized
form of money. Bitcoins aren't linked to any sort of central banking
system or issuing authority, and that's a big part of their appeal --
instead of being swallowed into system that's often sullied by human
greed and manipulation, this currency exists in an online world driven
by mathematics and clever encryption protocols.
You can use
bitcoins for all sorts of real transactions. To do so, you first buy
bitcoins however you like, either through your credit card, a bank
account or even anonymously with cash. Then your bitcoins are
transferred directly into your Bitcoin account, and you can send and
receive payments directly to a buyer or seller without the need for a
typical go-between, such as a bank or credit card company.
By
skipping the middle man in the transaction, you pay far less in
associated fees. Each party in the deal can also maintain a much higher
level of anonymity, which has both pros and cons for everyone involved.
Think of bitcoins as a digital equivalent of a cash transaction. If
you're so inclined, it's a nearly untraceable way to do business.
Spending or receiving bitcoins is as easy as sending an Email,
and you can use your computer or your smartphone. That simplicity
belies the fact that there's a whole lot of complicated math protecting
all of these transactions to maintain their legitimacy and security.
Keep
reading to see more about the mysterious rise of bitcoins, as well as
the inner workings of the network that keeps this so-called
"crypto-currency" alive and kicking.