If you read the news regularly, then you know about Bitcoin: a bit of a strange currency, it doesn’t really ‘exist’, doesn’t belong to any country, something like that. You can use it for online shopping, right? Well, by the time you get to the end of this post you’ll be able to talk to anyone about Bitcoin without feeling like a newbie.
What’s Bitcoin, and is it any country’s official currency?
Well, Bitcoin is indeed a currency, a unit of value. It isn’t any country’s official currency and,
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| A fictional bitcoin. |
as a matter of fact, there are no physically minted bitcoins, because they only exist online. Furthermore, no nation or company controls Bitcoin. It exists independently, but managed using controls so strict that to date they have proven infallible. Later I’ll explain more.
Where did it come from?
It was created a person or group of persons under the name of Satoshi Nakamoto and it appeared in 2008; since then it exists online as an open-source blockchain -a chain of data, which is all the actual accounting of the currency-. To date, about 16 million bitcoin have been created on this chain.
Who controls it, and how is it done?
That’s what makes Bitcoin unique. This blockchain I mentioned is a history of every bitcoin created, every transaction made with them, as well as every new bitcoin created for proof of work. I’ll explain this:
Let’s say you want to obtain Bitcoin. You sign up at a cryptocurrency exchange house online, and exchange whatever your local currency is, to buy 1 Bitcoin (or XBT1). On the next blockchain to be published, there will be a new line of code (called a hashtag) that tells that you obtained XBT1 and how you did so. Furthermore, you will receive a complete copy of the entire blockchain -that now includes your exchange transaction-. And every time to access the Bitcoin system online, your blockchain will update. This happens for Bitcoin owners worldwide. Yet keep in mind that on the blockchain, your transactions and any information about you are maintained completely confidential and private using a super encryption system and verification process.
Who maintains and updates this blockchain accounting system?
Users and owners are the ones who maintain and confirm the truthfulness of every single
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| Representation of the blockchain. |
transaction on the Bitcoin blockchain. Because transactions are taking place worldwide on a constant basis and, taking into consideration that there is a delay on the internet that is greater or smaller depending on the user’s equipment, the only way to verify the correct globally-unified timeline for every single transaction is through the scrutiny of every single line of hashtags on everyone’s individually-logged version of the blockchain until the perfectly-synchronized line for every specific transaction is located and identified. That puts each transaction (hashtag) in its rightful place in line. This process is called mining.
Mining, in layman’s terms, consists of analyzing Bitcoin system data using specific algorithms to locate every single right transaction at its right time; once found, the miner puts it up to a test of general consensus on the system and, if it passes the test, it joins the next blockchain update.
When and how do new bitcoins appear?
They are created every single day, with no human intervention or supervision. That’s part of the system.
As I mentioned, there are thousands of computers dedicated to reading Bitcoin data (miners use specific programs on dedicated servers to tackle such a daunting enterprise) to confirm which is the correct position for each transaction on the chain, using a mining process.
Well, when the owner of one of these computers locates the right line for a specific
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| The servers of Genesis Mining, one of the world's largest setups. |
transaction, and the blockchain is updated, that miner will receive an honorary, created on the spot by the blockchain, for her/his proof of work. And that honorary is 25 new bitcoins, which get added to the system.
In the first few months of the creation of Bitcoin, one could buy a laptop, get mining software and make money that way, even becoming rich. However, the system has grown so much, with so many daily transactions and miners competing for them that, in order to even make a living out of mining you need a conglomerate of computers with dedicated servers, likely making it an impossible enterprise to start anymore.
This whole Bitcoin setup: is it legal?
Absolutely. Bitcoin does not go against any laws of any country, and it is not considered money laundering in any way. It isn’t considered a remittances system, either, but a cryptocurrency with an open source control system under a strict consensus protocol.
Keep in mind that the governments of the U.S. and the European Union, among others, are looking for better ways to legitimize Bitcoin by making it adhere to some of the rules that are used in for money laundering control, because of the need to oversee the movement of money hoping to prevent drug trafficking payments and terrorism financing worldwide. This is something that applies sooner or later to every modernized nation wish to have a currency that is respected (and stable) worldwide. It’s logical that, at some point Bitcoin will look to implement identity control mechanisms because, to date, owners of Bitcoin worldwide are virtually anonymous.
Can I use Bitcoin?
Of course. Anyone can exchange his or her own currency for Bitcoin. There are thousands
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| A bitcoin teller machine, these can be found worldwide. |
of merchants worldwide that accept bitcoins as form of payment. It can also be used to pay in PayPal and eBay.
It’s a very interesting cryptocurrency project and a very volatile currency these days. It's been on unstoppable climb lately: 18 months ago one XBT was worth $1160, now it's $7680. However, it has been known to plummet in value precipitously.
As a currency, it’s highly subject to speculation by investors worldwide, and supply and demand change, drastically and often, due to the limited amount of bitcoins that exist. Its creators’ plan is to stop creating new bitcoins the moment they reach 21 million. At that point, miners who decide to continue working on mining will receive an honorary in other currencies.
It will be very interesting to see how this currency will evolve afterwards.
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