What You Need to Know About Bitcoin

It is no wonder that the digital currency known as Bitcoin emerged in 2009, a short while after Occupy Wall Street had placed the world’s largest banks in the spotlight with accusations of misusing investors’ money, rigging the financial system, duping their clients and charging mind-boggling transaction fees.

The pioneers of Bitcoin sought to put the users fully in charge of their money while getting rid of middlemen and interest fees. For this, they created a decentralized system, known as the blockchain. The blockchain is essentially a public ledger of all transactions that take place with Bitcoin. Unlike traditional financial systems where information is kept secret and guarded by a single authority, which allows for manipulation and security issues, the blockchain counters all of this.

In a relatively short time, Bitcoin has started gaining widespread acceptance and adoption, including with some big businesses, however, the lack of regulation has limited many institutional investors from entering this space.

What Exactly is Bitcoin?

Bitcoin is a virtual currency that was brought to the public’s attention in 2009, and it is the brainchild of an unknown developer working under the alias Satoshi Nakamoto. Bitcoin is completely decentralized i.e. transactions are completed without middlemen – this means, no banks or governments are involved. The virtual currency or often referred to as cryptocurrency can be used for anything from buying computer games and furniture, to booking hotel accommodation or simply transferring money across the globe. Bitcoins are bought through exchanges with traditional currency.  Once purchased, you store your Bitcoins (BTC) in a digital wallet that allows you to transact.

In a nutshell, a Bitcoin transaction can simply be described as the exchange of digital information that is encrypted and sent via a peer-to-peer network that works in a similar way to a file-sharing system like BitTorrent. Still, a lot of the hype that surrounds the cryptocurrency is the possibility of getting rich by earning Bitcoin, trading the currency or gaining more coins through a process known as mining.

What is Bitcoin’s Transactional Features?

Although Bitcoin is similar to fiat currencies (such as dollars, pounds sterling or euros) in the sense that it is used to pay for things, it has several important distinguishing features:

1.      Decentralization

Decentralization is Bitcoin’s single most important transactional characteristic; the Bitcoin network is not controlled by any single institution. Instead, it runs on a peer-to-peer network (nodes) spread across the globe, made up of Bitcoin users and miners. This has made Bitcoin an attractive choice for people who are not comfortable with banks or governments controlling their money. This decentralization, combined with the cryptography makes this technology far more secure than traditional, centralized systems.

2.     Limited Coin Supply

Fiat currencies are theoretically in limited supply, but central banks often print more and issue more notes which are not necessarily backed by an asset (in the past this was gold), this results in inflation which affects its intrinsic value relative to other currencies. On the other hand, Bitcoin’s algorithm tightly controls its supply. A small number of new coins trickle into the network over years at a diminishing rate until the maximum of 21 million BTC has been achieved.

3.     Pseudonymity

For purposes of compliance with anti-money laundering regulations and other related laws, senders of traditional electronic financial transactions have to be identified. However, Bitcoin users do not have a central ‘validator’ and do not need to reveal their identity, instead operating in semi-anonymity. This feature, while being one of the main attractions of Bitcoin by preserving user privacy, has also opened up the currency to less-than-legal endeavors by criminal groups and rogue states like North Korea.

4.     Immutability of Transactions

Unlike electronic transactions involving fiat currencies, Bitcoin transactions are irreversible. This is down to the fact that there is no central authority to effect reversals. Once a transaction has been recorded and the transaction has been confirmed by multiple miners, it is impossible to modify. Although this feature may make some users uneasy, it also means that transactions are almost impossible to tamper with.

What Does the Future Hold for Bitcoin?

At the moment, it is unclear what the future holds for this cryptocurrency, whose value rocketed to a peak of $20,000 for single BTC in 2017. Although it remains mostly unregulated, its rising popularity means that some countries like China, Australia and Japan are considering regulation of Bitcoin as well as the other major cryptocurrencies. It is however clear that cryptocurrencies like Bitcoin are going to redefine how we transact now and into the future.