What is Bitcoin?

IHB Bitcoin Guide What is Bitcoin

Introduction: What is Bitcoin?

 

In its simplest terms, Bitcoin is money that can be sent and received over the internet. It is called a digital currency because it lives on computers and moves between them. The computer could be your mobile phone, tablet or PC. Stored Bitcoin can be accessed with a software application called a bitcoin client that can be easily downloaded from the internet on to your computer or can be accessed via online accounts maintained by third party service providers.

Though one Bitcoin is commonly referred to as a unit of currency, Bitcoin can be transferred, bought and sold down to a satoshi, or 0.00000001 of its value. This means Bitcoin can be used to buy big-ticket items like homes and cars and works just as well if you want to purchase a newspaper or a cup of tea or coffee.

The generally accepted Bitcoin symbol is ฿. It is listed as BTC in exchange listings and as XBT in ISO currency code.

Bitcoin can be viewed as electronic money and a medium of exchange for conducting business and storing value. It is called the ‘Money for the Internet Age’ as Bitcoin is currency that can be sent and received from anywhere in the world over the internet, besides a few other networks.

The most popular use of Bitcoin provides a way to send, receive and store value across the internet for little to no fees. The peer-to-peer network supports these transactions through block chain technology, resulting in no need for middlemen or financial institutions. With Bitcoin, every individual can essentially become their own bank and achieve ultimate financial freedom. Now the 2.5 billion people in the world that don’t have bank accounts can finally enjoy the utility of modern payment systems.

Bitcoin was created in 2009 by an unknown developer, or team of developers, working as the alias Satoshi Nakamoto. The reason for remaining anonymous is solely derived from the main purpose of Bitcoin — to provide a monetary system not controlled by a central authority. The developers wrote the software and let world determine its strength.

With only about six years since inception, Bitcoin is still an infant. Many entrepreneurs are determined to strengthen its utility by providing ways for individuals to spend Bitcoin and merchants to accept it. Merchants are attracted to this technology simply due to the fact they can cut costs by eliminating credit card fees. Everyday, more and more businesses begin to incorporate Bitcoin.

One very important misconception commonly addressed about Bitcoin is that it is completely anonymous. Every single transaction around the globe is recorded on a public ledger. This means that every single address can be tracked. Bitcoin is NOT anonymous. At best, transactions are pseudonymous, meaning they use addresses in place of names.

Bitcoin is also the name of the protocol (or a set of rules) on which the Bitcoin system is based. It consists of thousands of networked computers connected to the Internet and running the Bitcoin client. Each computer running the Bitcoin software is called a node and each node can communicate with the other nodes on the network making it a peer-to-peer system. Nodes can connect and disconnect from the network at any time and rejoin to become a part of it. They do not respond or report to a central server making this a decentralized setup.

What qualifies Bitcoin as usable money and why is there a growing interest in it as an alternative to paper notes and metal coins?

Pieces of gold used to be exchanged for goods and services before the arrival of paper money and metal coins. Gold was scarce, durable and required a lot of effort to mine which made it valuable enough to serve as a means of exchange and as a store of value. It could also be broken down to tiny pieces or shaped to larger bars or ingots to match the value of the traded item.This later gave way to government controlled paper currencies (also known as fiat money) entering the economy due to their ease of use and exchange and as a unique proclamation of power of the issuing authority. Soon, many countries began to print money relentlessly, without regard to preserving the value of the currency already in circulation, more so in times of heavy national debt and wars. The value of fiat money introduced into the economy no longer reflected the true value of the nation’s assets. This led to a devaluation of money, or rise in prices, leading to inflation.

Inflation in many countries around the world has led people to lose faith in their national currencies. They are gradually finding themselves less able to afford necessities to meet their needs for the same amount of money. The amount that could buy them a loaf of bread a month ago could now buy them only a half. Governments’ wasteful expenditure and unstable political situations in many countries resulted in the quest for a currency that could

  • not be controlled or manipulated by any single government, corporation or legal body.
  • be verified so all the transactions are legitimate
  • not be manipulated to allow duplicate transactions or counterfeit units
  • could be used effortlessly and be accessible to people around the world

 

Bitcoin as a currency meets all the above requirements and brings a host of advantages that make it the perfect fit in today’s networked world, leaving behind outdated barter and fiat systems in the dust.

Who is Satoshi Nakamoto?

The concept of Bitcoin was introduced by an anonymous person or group with the assumed name Satoshi Nakamoto in January 2009 through the release of a technical paper known as the Bitcoin Whitepaper. It was titled Bitcoin : A peer-to-peer electronic cash system. Many interesting theories make the rounds about Nakamoto’s identity but none of them have been confirmed. (Include interesting guesses about Satoshi Nakamoto’s identity, we already have an article about it on IHB.) There are several other digital currencies known as altcoins in the market like Dogecoin, Peercoin and Litecoin but Bitcoin remains the most popular and the voluminously traded virtual currency.

Why is Bitcoin so popular?

International transfer of money(remittances), quick transfers, buying and selling online from buyers and sellers around the world, Pay via mobile device conveniently in brick-and-mortar-shops, charities, low transfer fee compared to bank charges, opens up global services markets.

For the first time in history, Bitcoin has made it possible to transfer money over the Internet safely and efficiently. What seemed to be of academic appeal to scientists and cryptographers as a programming marvel in the beginning, has now assumed enormous importance in business and financial circles. It is now viewed as a powerful force to bring billions of people around the world into the global financial fold.

Millions in the developed world and developing world do not have access to basic banking services due to exorbitant service fees and poor infrastructure. People who work overseas pay very high transfer and currency exchange fees to send money back home to their families. Bitcoin presents a frictionless and borderless transfer solution in these situations. Transfer of money without political or corporate interference opens up the services market making it more competitive and provides a chance for everyone to be a part of the global economy.

Many charities have accepted Bitcoin donations from around the world with ease to bring about significant progress in communities in the remotest corners of the earth. Merchants and retailers have long dreaded the reimbursement called chargebacks they need to fulfil to credit card companies if the credit card payment turns out to be fraudulent. The finality of the payment is an advantage to businesses as they no longer have to worry about chargebacks. They also pay a fraction of the transfer fee they pay to credit card companies for payments, which is why big name retailers and service companies have opened up to accepting bitcoin.

Implementation of the feature of timestamping of transactions in the Bitcoin protocol in path-breaking fields like voting and smart contracts have already seen significant research. Industry leaders and venture capitalists who see immense potential in this technology are investing millions of dollars in Bitcoin-based companies.

How are new Bitcoins released?

Bitcoin has no government or central bank introducing new currency into the economy. Unlike paper notes or coins, Bitcoin cannot be brought into existence physically, outside the network. Nor does the system have branches or agencies either at the sender’s or the recipient’s end to check if the Bitcoin is genuine and the transaction is indeed valid. Bitcoin miners accomplish these two very important tasks of releasing new bitcoins into the system and verifying ongoing transactions through a computing process called Bitcoin mining. Any computer can become a miner and the job involves using adequate computing power requiring specialized hardware and software to accomplish these tasks.

Say, a guest at a restaurant pays for a meal with Bitcoin. The Bitcoin is sent from the sender’s wallet address to the restaurant’s wallet address over the network. Information of all such transactions over a certain period of time, say past 10 minutes, are held together in what is known as a block. The block now consists of recently initiated transactions waiting to be confirmed. Based on the information available in the block and a few other pieces of data, the miner’s computing setup has to keep supplying inputs, one of which satisfies the rules under which the block can be unlocked and the transactions can be verified. The block containing the confirmed set of transactions is now added to the block chain. The block chain is the publicly available ledger that contains information about every Bitcoin transaction that has ever occurred over the network.

An unverified transfer is instantaneous. Transactions with at least six confirmations are considered secure, though each confirmation happens with mathematical precision. Assuming one confirmation roughly every ten minutes, transactions take about 10 to 60 minutes to be considered final. The Bitcoin network uses a tight and secure encryption process called SHA256 double round hash verification to validate transactions. The first Bitcoin block to have ever been mined in 2009 is known as the Genesis Block.

All bitcoin payments are irreversible, but like cash, can be refunded by the recipient by initiating a new transaction. It is important to double check the address the funds are being sent to. The system will not let you complete a transaction if the receiving address is invalid.

Release of bitcoins has been cleverly designed to be time-bound, such that all the coins are not released at once to the mining rig with the greatest computing power. As the number of miners increases, so does the difficulty or the computing resources required to generate new bitcoins. The system is designed such that new coins are released roughly every 10 minutes, about 25 as of now. The rate of generation halves every four years until all the bitcoins have been mined. 21 million will be the highest number of Bitcoins that will be ever mined by the year 2140.

So far, roughly over 13 million bitcoins of the pre-determined 21 million have been mined. The difficulty of mining is adjusted automatically by the Bitcoin system to ensure that bitcoins are issued at a consistent rate.

If Bitcoin is so powerful, why do some headlines constantly scream negative stuff about it?

Firstly, negative news is more attention-grabbing than good news. Panic mongering among those who have not put in the effort to understand new technologies is not exclusive to the Bitcoin industry alone. Many who could not understand the democratic nature of the Internet suspected web based services like ecommerce and news broadcasting were the signs of a ‘bubble’. Just like a few banks have closed doors due to mismanagement and poor security implementation, so have poorly managed exchanges gone out of business. Just like the failing of a few banks did not see a worldwide shutting down of banking services, a few defunct exchanges do not impact the significance of a technology that has the potential to revolutionize financial services on a global scale.

Unlike scams or ponzi schemes whose operations are shrouded in secrecy, the Bitcoin system is very transparent. Anyone from any place in the world who seeks to track money movements via Bitcoin may do so by viewing the public ledger block chain.

Scams and schemes are usually run by individuals or organizations that control operations from behind. Bitcoin is not owned or regulated by any group of people or political power making it a truly independent financial system.

A popular myth held about Bitcoin transactions is that they are anonymous which have made them the currency of choice for illicit activities.

At best, Bitcoin transactions are pseudonymous, using addresses in place of names and in reality, cash is a safer way to pay for and move illegal goods anonymously.

Participating in the Bitcoin system as a programmer, investor, miner, merchant or shopper is entirely optional and there is no one to lure common folks from parting with their hard-earned money with get-rich-quick schemes. Fearing the payment system as a scam, ponzi or pyramid scheme reflects the fact that Bitcoin education still has a long way to go before its ease and convenience are appreciated, a goal we hope this course will accomplish.