Demystifying Bitcoin
Bitcoin. We hear about it almost daily. Prices are up, prices are down (as of this writing 1 Bitcoin = $13,502.00 U.S. Dollars). But what is Bitcoin anyway? To answer this question, let’s first cover how transactional banking works. Within every banking structure, a centralized system keeps track of accounts, manages balances and clears transactions. When I send money somewhere, my account has to be located, the funds must be debited, and the transaction is cleared after being sent to the receiver. Imagine what would happen if I sent money somewhere and it was never debited giving me the ability to send it again somewhere else? This double-spending would cause our entire banking system as we know it to collapse. This is why we have banks with centralized systems that talk to each other. They keep our accounts current, manage our balances and conduct our transactions by matching everything up to their centralized systems.
Bitcoin is the brainchild of an inventor named Satoshi Nakamoto however he (or "they" as no one really knows who Satoshi is) never intended to invent a currency. In 2008, he created Bitcoin. Initially, it was a network that would be used to send money from person to person without a centralized banking system clearing the transactions. While other developers tried to create person-to-person or peer-to-peer networks to conduct money transfers, without a centralized system clearing the transactions, it became impossible to prevent double-spending. That is, until Bitcoin.
Instead of centralizing the clearing of transactions, Nakamato figured out a way to decentralize the process but still prevent double-spending. At the heart of Bitcoin is a ledger, called a blockchain which stores every single transaction in chronological order. Every peer in the network keeps a copy of the ledger and there needs to be absolute consensus since there is no central bank system. The ledger consists of all transactions in a database that no one can change without meeting very specific encrypted conditions or puzzles. The act of solving these puzzles is known as cryptography. Bitcoin is a cryptocurrency which is a currency that uses cryptography to secure its transactions.
When you send Bitcoin to someone, your digital wallet anonymously sends the encrypted transaction to every peer on the network which all get updated to reflect the debit from your account and the credit to the receiving account. Since every peer has a record of the transaction, there is no double-spending, no middleman, no bank, and no bank fees. Transactions are irreversible, anonymous, fast, global, secure and anyone can download the software for free making the whole concept very attractive (except to banks). Transactions are sent nearly instantly and are confirmed in typically a few minutes by Bitcoin Miners.
Bitcoin Miners are people like you and me who have invested in very powerful computer processing systems to help confirm all of the transactions on the Bitcoin network. Only miners can confirm transactions. Once transactions are confirmed, the miner packs them into a block and a cryptographic puzzle must be solved in order to attach it to the previous block in the blockchain. The transactions then propagate throughout the network. In return for using their computers to confirm transactions, miners receive a specific number of Bitcoins. This is the only way to create Bitcoin and the entire process is full of rules and puzzles that increase in complexity to prevent abuse.
To get started visit Bitcoin.org to learn more. You can then choose a Bitcoin Wallet, transfer money from your bank account to exchange for Bitcoin, and use it to pay for things right from your Bitcoin wallet. Purchases are made in fractions of Bitcoins so $10 equals around 0.000732 Bitcoin.
Whether the world will embrace it as an official currency is yet to be seen. Regardless, people are using it to pay for goods, services and to transfer bitcoin to each other. Early adopters have made fortunes. While today we are asking “What is Bitcoin?”, future generations may someday ask “What is a dollar?”.
