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To cut through some of this confusion surrounding bitcoin, we need to separate it into two components. On the one hand, you have bitcoin-the-token, a snippet of code that represents ownership of a digital concept sort of like a digital IOU. On the other hand, you have bitcoin-the-protocol, a distributed network that maintains a ledger of balances of bitcoin-the-token.
The system enables payments to be sent between users without passing via a central authority, such as a bank or payment gateway. It's created and kept electronically. Bitcoins arent printed, like dollars or euros theyre made by computers all around the world, using free software.
It was the first instance of what we call cryptocurrencies, a growing strength category that shares some features of traditional currencies, together with verification based on cryptography.
A pseudonymous software programmer going by the name of Satoshi Nakamoto proposed bitcoin in 2008, as an electronic payment system based on mathematical evidence. The idea was to generate a means of exchange, independent of any central authority, which could be transferred electronically in a secure, verifiable and immutable way.
Bitcoins most important feature is it is decentralized. No single institution controls the bitcoin network. It is maintained by a group of volunteer coders, and run through an open network of dedicated servers spread around the globe. This attracts individuals and groups who are uncomfortable with all the control that banks or government institutions have over their money. .
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Bitcoin simplifies the dual spending problem of electronic currencies (in which electronic assets can easily be copied and re-used) through an ingenious combination of cryptography and economic incentives. In electronic fiat currencies, this function is fulfilled by banks, which gives them control over the traditional system. Together with bitcoin, the integrity of the transactions is maintained by a distributed and open network, owned by no-one. .
Fiat currencies (dollars, euros, yen, etc.) have an unlimited supply central banks can issue as many as they want, and can try to manipulate a currencys value relative to others. Holders of this currency (and especially citizens with little alternative) bear the price.
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Together with bitcoin, on the other hand, the distribution is tightly controlled by the underlying algorithm. Even a small number of new bitcoins trickle out every hour, and will continue to do so at a diminishing rate until a max of 21 million has been attained. This makes bitcoin more appealing as an asset in theory, if demand grows and the distribution remains the same, the value will increase. .
While senders of traditional electronic payments are usually identified (for verification purposes, and to abide by anti-money laundering and other legislation), users of bitcoin in concept operate in semi-anonymity. Since there's absolutely no central validator, users do not need to identify themselves when sending bitcoin to another user. When a transaction request is filed, the protocol checks all previous transactions to confirm that the sender gets the necessary bitcoin in addition to the ability to send them.
In practice, every user is identified with the address of their pocket. Transactions can, with a little effort, be monitored this way. Also, law enforcement has developed methods to identify users if necessary.
Furthermore, most exchanges are required by law to my site perform identity checks on their customers before they are allowed to purchase or sell bitcoin, facilitating another manner that bitcoin utilization can be monitored. Since the network is transparent, the progress of a particular transaction is visible to all.
This is because there is no central adjudicator that can say ok, return the money. When a transaction is listed on the network, and if more than an hour has passed, then it's impossible to modify.
Even though this might disquiet a few, it will mean that any transaction on the bitcoin network cannot be tampered with.
The smallest unit of a bitcoin is called a satoshi. It is one hundred millionth of a bitcoin (0.00000001) in todays prices, roughly one hundredth of a cent. This could conceivably enable microtransactions that traditional electronic money cannot.
Bitcoin is a digital currency, also known as a cryptocurrency. It had been invented in 2008 by an anonymous person or group named Satoshi Nakamoto.