Bitcoin is not a new concept; the idea of using a digital currency to pay for goods and services has been around since the early 1990s but bitcoin is the first ‘crypto-currency’ to show a degree of success. Bitcoin, like a dollar bill or pound sterling, has no inherent value – its value is built upon its acceptance as a payment for goods and services. And unlike traditional currency, bitcoin has no central bank and no government that controls its supply; the creation and transfer of bitcoin is designed entirely around cryptography.
The social and economic impact of bitcoin is far-reaching, and the technology behind it is very complex. You can read more about these subjects at the following links:
- Bitcoins are stored electronically on a wallet that can be downloaded here.
- Bitcoins can be transferred securely and anonymously between anyone on the network.
- Transactions are public (although anonymous) and broadcast within seconds and verified within an hour.
- Bitcoin transactions cannot be reversed.
- Bitcoin transactions can be received while the recipient’s computer is switched off.
While bitcoin has no monetary authority, there are some rules in place that aim to help stablise the currency.
- The supply of bitcoin is limited to around 21,000,000 BTC.
- The smallest fraction of a bitcoin that can be transferred is 0.00000001 meaning a total of 21×1014 currency units are possible.
- Unlike traditional bank transfers, bitcoin transactions are either cheap or have no cost at all.
The availability of bitcoin is limited by ‘mining’; a process that uses a large amount of processing power to ‘solve’ a block-chain. As more bitcoins are mined, the difficulty of successfully mining a bitcoin becomes harder until there are zero bitcoins left to mine. The high processing power required to mine a bitcoin has a small cost attached to it that guarantees the value of a bitcoin so long as there is demand for it.