What is Bitcoin and Why Should We Use It
Bitcoin is a new currency that hit the market with with mixed fan fair, some herald it as the future of finance while others criticize it as the flagship money laundering opportunity. This new form of currency is created and distributed electronically. Originally, it was created by the either a lone Japanese software developer or potential it was a group endeavour using the singular pseudonym Satoshi Nakamoto, back in 2008. This innovating developer(s) aimed to create a digital currency that could be exchanged, traded and transmitted electronically and securely without a central authority or payment gateway regulating and controlling the nascent coin, therefore minimizing transaction fees and providing freedom to the user. This makes it the first in its class of what we call, cryptocurrencies.
Bitcoin is unique in that it will be capped at 21 million units, versus a central banks ability to issue out and manipulate its currency. The limit of Bitcoin means that its value will be based off supply and demand of the currency as well a energy and time it cost computer to create the digital asset, while the value of fiat currency is based off the governmentally regulated issuing bodies need to inflate or deflate their respective currency. As mentioned previously the intrinsic value in bitcoins is due to the fact that computers (using time and electricity) have to compete with each other to mine (mining is a process of computers solving increasingly more complex algorithmic formulas) for more bitcoins at a exponentially difficult rate of production. Fiat currency such as the US dollar, used to have an intrinsic value was converted to purely extrinsic value system when all the fiat financial systems left the Gold Standard.
While fiat currencies do have a digital counterpart to some degree, Bitcoin is unique to them because it is completely digital and decentralized, making the bitcoin network independent from any individual institution. While banks and governments have control over their currency and maintain a centralized ledger, the nascent blockchain technology behind Bitcoin uses a distributed ledger that is shared and audited continuously across millions of computers (using a vast amount of computing power), giving Bitcoin an added level of transparency over the easily printed and inflated fiat currency. The popularity that Bitcoin has spawned a variety of other cryptocurrencies often grouped together as Altcoins, with the major leaders being Ethereum (ETH), Ripple (XRP), and Bitcoin Cash (BCH).
Another benefit to Bitcoin is that it can also be incredibly divisible, with its smallest unit (satoshi), one millionth of a bitcoin. This gives you the ability to make micro-transactions that fiat currency is not able to accomplish. Also, Bitcoin uses a peer-to-peer infrastructure making payments instantaneous.
Since Bitcoin is a digital currency, there needs to be a digital account to hold and store the balance of the user. The balance is held in a key which are generated through a mathematical algorithm creating a series of digits, which serve essentially as the accounts. The keys come in two varieties, one public and one private. The public key is the point of contact for others to send you bitcoins, equivalent to a bank account number while the private key is used to approve of bitcoin transmissions. The security features of Bitcoin are robust, in order to use bitcoins, you need to use an electronic wallet, and KYC (Know Your Client) practices are becoming tighter, making Bitcoin a less than appealing currency for criminals, terrorists or money-launderers, however this is not currently foolproof. One of the security aspects of Bitcoin is that transactions cannot be “reversed” or altered in that there is no central authority to modify the transaction.
In order for new Bitcoins to enter the market, this is accomplished by either individuals with homemade rigs or companies (miners) dedicating computing power to solve algorithmic formulas to release new blocks (blocks contain bitcoins). The miners indulge in this because they receive the released bitcoins, as well as transaction fees paid in bitcoin. The cryptocurrency is being released at a slowly declining rate until the 21 million cap is reached. Originally a mined block contained 50 bitcoins, but decreases every four years, and as it decreases the computing power necessary to mine increases. While mining at one time could be accomplished with a single PC, the rate of difficulty has resulted in the building of proprietary systems using linked Graphic Processing Units (GPU’s).
Why use Bitcoin?
While it may take some time for cryptocurrencies to make their way into the public’s mainstream usage for everyday activities, it is undeniable that Bitcoin is changing the landscape of how we perceive money.