You’ve most likely heard the name and maybe some of you have used Bitcoin. But what is it, really? Bitcoin is described by people who understand it as the first example of a growing category of digital money known as cryptocurrency, of which Bitcoin is by far the largest.
It’s a different animal, a unique form of digital money (no bills nor coins) created and held electronically, and accessed via a computer or smart phone. Nevertheless, Bitcoin can be used to buy things or services on the Internet or via the Internet. In that sense, it’s like conventional American dollars, euros or yen, which are also traded digitally.
A Parallel Monetary Universe
But it’s not traditional currency. Bitcoin is a parallel monetary universe that has no direct connections with our traditional monetary systems, including the U.S. Treasury. It was said to be created around 2008 by software developer Satoshi Nakamoto, who described it as an electronic payment system based on a complex mathematical formula.
Many believe there actually is no such person as Satoshi Nakamoto and that Bitcoin was created by a group of anonymous programmers. The idea was to collaborate to produce a currency independent of any central authority and transferable only electronically, and more or less instantly, with very low transaction fees.
Bitcoin buy and sell transactions are generally made in Bitcoin denominations. For instance, when we checked cex.io, for $100 you could purchase .034th of a full Bitcoin, or you could buy 0.34th of a Bitcoin for $1,000.
Bitcoin’s most important characteristic, and the thing that makes it different from conventional money, according to the Bitcoin experts, is that it is a totally decentralized form of currency. As designed by its creator(s), no single institution or country controls the Bitcoin network. Some – maybe many – techie people see this as positive because it means that no one entity can control their money.
Bitcoin is Evolving
Bitcoin is evolving and, if not yet ubiquitous, it’s becoming more popular. Today, there are a surprisingly large number of retailers that accept Bitcoin. Small businesses may be especially attracted to this new form of currency because there are no payment card transactions. Bitcoin is also popular internationally because it’s not tied to any country or subject to regulation.
Bitcoin in 2017 performs much the same as other forms of digital money. It is stored in a digital Bitcoin wallet, which exists either in the cloud (a type of Internet-based computing) or on a user’s computer or smart phone. Comparable to the mobile wallet app you may now be using through your credit union or bank, the Bitcoin wallet is a virtual account that allows users to send or receive Bitcoins, pay for goods and services, and even save their Bitcoins for a rainy day.
Where Do Bitcoins Come From?
Bitcoins are created using a complex mathematical formula and computing power in a distributed network that anyone can join as long as you understand the Bitcoin protocol, that is, the mathematical formula and rules that govern how Bitcoin works.
This cyber community processes Bitcoin transactions, making it a de facto payment network comparable to a more traditional electronic funds transfer system. However, unlike an EFT network, Bitcoin wallets are not insured by the FDIC (Federal Deposit Insurance Corporation), which protects deposits and withdrawals between accounts at financial institutions.
If you’re interested in trying out Bitcoin, how do you do it? Most of us would probably acquire our Bitcoins from a so-called “Bitcoin exchange” through which anyone can buy and sell Bitcoins using different currencies – there are many exchanges worldwide.
And, even as a new user, you can start acquiring and spending Bitcoin without understanding the technical details. Once you have installed a Bitcoin wallet on your computer or mobile phone, it will generate your first Bitcoin address and you can create more addresses whenever you want.
What about security?
A Bitcoin wallet is protected by a secret piece of data called a private key or seed, which is used by the Bitcoin holder to sign transactions – the names of buyers and sellers are never revealed, only their wallet IDs. The key provides mathematical proof that the Bitcoins actually come from the owner of the wallet and also prevents the transaction from being altered by anybody else once it has been issued. Because of this private key, you can give your addresses to your friends so that they can pay you with their Bitcoins, or vice versa.
Finally, the worldwide use of Bitcoins is completely transparent through a shared public ledger called a blockchain, which anonymously and sequentially records all Bitcoin transactions for the entire Bitcoin world to see and oversee. This ensures through thousands of watchful eyes that the Bitcoins are actually spent by the person (i.e., Bitcoin address) who owns them, security against the Bitcoins being stolen by cyber thieves.
A final note on Bitcoin volatility
Keep in mind that since Bitcoin is based entirely on supply and demand without regulation, its value can go up and down in the blink of an eye. Bitcoin.com reports that on April 1, 2017, you could purchase a full Bitcoin for $1,085.68 and as of May 26, 2017, that same Bitcoin was valued at $2,371.64. One leading financial expert told MarketWatch that Bitcoin is still in its infancy and has many major issues to overcome before it can be a viable payment system for mainstream consumers.