Bitcoin is a payment system introduced as open-source software
in 2009 by developer Satoshi Nakamoto. The payments in the system
are recorded in a public ledger using its own unit of account,
Although its status as a currency is disputed, media reports
often refer to bitcoin as a cryptocurrency or digital currency.
Besides mining, bitcoins can be obtained in exchange for fiat
money, products, and services. Users can send and receive
bitcoins electronically for an optional transaction fee using
wallet software on a personal computer, mobile device, or a web
application. Bitcoin as a form of
payment for products and services has seen growth, and merchants
have an incentive to accept the digital currency because fees are
lower than the 2-3% typically imposed by credit card
The most important part of the bitcoin system is a public ledger
that records financial transactions in bitcoins. Recording
transactions is accomplished without the intermediation of any
single, central authority. Instead, multiple intermediaries exist
in the form of computer servers running bitcoin software. By
connecting over the Internet, these servers form a network that
anyone can join. Transactions of the form payer X wants to send Y
bitcoins to payee Z are broadcast to this network using readily
available software applications. Bitcoin servers can validate
these transactions, add them to their copy of the ledger, and
then broadcast these ledger additions to other servers.
All bitcoin transfers are recorded in a computer file that acts
as a public ledger called the block chain, which everyone can
examine. Where a conventional ledger records the transfer of
actual bills or promissory notes that exist apart from it,
bitcoins are simply entries in the block chain and do not exist
outside of it.
Maintaining the block chain is called mining, and those who do
are rewarded with newly created bitcoins and transaction fees.
Miners may be located anywhere in the world; they process
payments by verifying each transaction as valid and adding it to
the block chain. Paying a transaction fee is optional, but may
speed up confirmation of the transaction. Payers have an
incentive to include such fees because doing so means their
transaction will likely be added to the block chain sooner;
miners can choose which transactions to process Without access to
these purpose built machines, a bitcoin miner is unlikely to earn
enough to even cover the cost of the electricity used in his or
her efforts. which split the work and the reward among all
participants and make mining a less risky endeavor. Even for
those who join pools, the cost of the electricity necessary to
mine may outweigh the bitcoin rewards from doing so.
The public nature of bitcoin means that, while those who use it
are not identified by name, transactions can be linked to
individuals and companies. All transactions are recorded into a
public ledger, the block chain, and are viewable by everyone.
Additionally, many jurisdictions require exchanges, where people
can buy and sell bitcoins for cash, to collect personal
information. The privacy concerns of some who use bitcoins are
sufficient to cause them to take additional steps to cover their
tracks. In order to obfuscate the link between individual and
transaction, a different bitcoin address for each transaction can
be used, and others rely on so-called mixing services that allow
users to trade bitcoins whose transaction history implicates them
for coins with different transaction histories.
All in all, Bitcoin is a great system of currency for the common
man. As with any currency, there is an economic bubble about it,
that will pop and its value will hold someday. For now, only time
will tell if it will turn out to be a feasible currency.