Bitcoin is a cryptocurrency, probably the first one and certainly the best known one around nowadays. It was the invention of a person or group of persons called Satoshi Nakamoto, who inadvertently ended up creating Bitcoin while trying to create a decentralized digital cash system.Build Your Own Website Or Online Store >
Bitcoin, and other cryptocurrencies, are based on blockchain technology, a distributed ledger system that allows people to transact with each other over a peer-to-peer network without resorting to mediation or regulation by a central controlling authority. What that means is that Bitcoin is not controlled by any government, or geo-political or business organisation.
All Bitcoin transactions are encrypted and stored across a peer-to-peer network on several thousands of computers. It would be close to impossible for a single computing device to break this entire network. You can think of Bitcoin as a ledger system spread across and validated by multiple computers instead of a single entity
Multiple transactions are combined into blocks and then Bitcoin 'miners' - individuals or groups with powerful computer arrays - compete with each other to solve cryptographic puzzles. The one who wins gets to add a new block to the blockchain. The blockchain then generates new Bitcoins (12.5 Bitcoins as of 2017) and gives it to the miner as their reward for solving the mathematical puzzle.
The blockchain is then upgraded across the entire network. If you mess with any of the blocks you will break the entire chain and you would need collossal amounts of computing power to disrupt each and every copy of the chain stored across multiple computers on the network.
No government organisation can create new Bitcoins or set their value. You can only create new Bitcoins through the process of Bitcoin mining. This non-centric nature of Bitcoin has huge implications for banking, payments and financial regulation organisations around the globe.
One of the main drivers of the global value of any currency is trust. Right now, the US Dollar is the most powerful currency around on the planet. Many international transactions are carried out in the US dollar - oil, for example - and many countries hold US dollar reserves in their central banks. All this is because the US has a strong economy and the largest one on the planet.
It has mega-corporations such as Walmart, Apple, Exxon Mobil, Google and Amazon with global operations. It has Hollywood that creates a larger-than-life picture of the US and popularises American culture around the globe. It has 11 aircraft carrier groups sailing the world's oceans, enforcing its role as a global superpower.
And every few years it goes and bombs some country to put the fear of God into everyone. It also does not like it when Russia tries to go and bomb someone else. That is why you will never hear anyone saying they want to grow up and make millions of Roubles.
All this makes the US dollar a strong force to reckon with. Similarly, people trust the Euro, because they believe in the strength of Western European economies. The British pound enjoys a certain level of trust as well, owing to its historical background as the leading global superpower up until World War II and also for the global usage of English as the de-facto language of business worldwide.
China is the world's second-largest economy but its currency does not hold much clout outside its physical borders. Do you know what the Chinese currency is called? This may well be because no one likes the Chinese Communist government, and while everyone likes Chinese food, Chinese languages, culture and history are not very well understood by many around the world.
Bitcoin and other cryptocurrencies have yet to achieve this global level of trust. To begin with, you have to put your faith in computer networks and blockchain technology and cryptography. Outside a bunch of computer geeks and tech-savvy investors, there are few people in the general public who truly understand how cryptocurrencies work.
It is even harder to predict where they will go. Could malware steal your life savings? Could a computer virus collapse the Bitcoin network? These are questions that need to be answered before cryptocurrency completely takes over the world.
Usage is growing rapidly, though. There are hundreds of cryptocurrencies around in circulation nowadays and their total market value has already driven past $150 billion. Bitcoin and Ethereum are two of the most popular ones and it seems lots of people are skipping the math lessons and moving straight to market realities.
You can buy Bitcoin and store it in digital wallets on your laptop or mobile. You can then use it for payments online with ecommerce sites that allow Bitcoin transactions, or just sit on it and use it as a commodity. Cryptocurrency markets are volatile and prices keep fluctuating all the time.
The Dollar, Euro and UK Pound may be strong and used widely, but they are still controlled by governments and while they will hold their value for some time to come, unpopular changes in policy or idiotic leadership may help drive down their value. Also, it takes days to move these currencies around the globe and you may have to convert them into other currencies for local use.
Cryptocurrencies such as Bitcoin have their obvious attractions compared to traditional currencies. Governments are still figuring out how to regulate them and tax them so right now you can move them around the globe fast. This lack of regulation is also not good when anti-social elements and criminals start using cryptocurrencies to carry out anonymous transactions online.
Some corporates are coming up with their own crypto cash systems though it is hard to see how these are true cryptocurrencies. If you are a corporate controlling the creation and flow of your own cryptocurrency your creation is little more than a voucher or corporate cash token. However, a large corporate could very well use a proprietary cryptocurrency to streamline global operations - you could buy products from one part of the world and sell them in another pretty fast. They also have access to large customer databases that might enable large-scale blockchain adoption.