Bitcoin is a digital currency that functions without central control or oversight by banks or governments. Instead, it relies on peer-to-peer software and cryptography.
A public ledger records all bitcoin transactions, and copies are stored on servers around the world. Anyone with a spare computer can install one of these servers, called a node. Consensus about who owns what coins is achieved cryptographically through these nodes, rather than relying on a trusted central source, such as a bank.
Each transaction is broadcast publicly on the network and shared from node to node. Every ten minutes or so, miners aggregate these transactions into a group called a block and add it permanently to the blockchain. This is the ultimate ledger for bitcoins.
In the same way that traditional currencies are stored in a physical wallet, virtual currencies are stored in digital wallets and can be accessed through client software or a range of online and hardware tools.
Currently, bitcoins can be divided to seven decimal places: one thousandth of a bitcoin is known as a mil, and one hundred millionth as a satoshi.
In reality, there is neither a bitcoin nor a bitcoin wallet, but a network agreement on the ownership of a currency. The private key is used to prove ownership of the funds in the network when a transaction is made. A person can simply memorize their private key and not need anything else to withdraw or spend their virtual money, a concept known as a "brain wallet."
Can bitcoin become cash?
Bitcoin can be exchanged for cash like any other asset. There are numerous online cryptocurrency exchanges where people can do this, but transactions can also be done in person or through any communication platform, allowing even small businesses to accept bitcoins. There is no formal mechanism built into bitcoin to convert it into another currency.
Nothing inherently valuable underpins the bitcoin network. But this is true for many of the world’s most stable national currencies since leaving the gold standard, such as the US dollar and UK pound.
What is bitcoin for?
Bitcoin was created as a way to send money over the internet. The digital currency was intended to offer an alternative payment system that could operate without central control, but otherwise be used in the same way as traditional currencies.
Are bitcoins secure?
Bitcoin cryptography is based on the SHA-256 algorithm developed by the US National Security Agency. Decrypting it is impossible as there are more possible private keys to prove (2256) than there are atoms in the universe (approximately between 1078 and 1082).
There have been several cases of bitcoin exchanges being hacked and funds stolen, but these services invariably store the digital currency on behalf of customers. In these cases, it was the website that was hacked, not the bitcoin network.
Theoretically, if an attacker could control more than half of all existing bitcoin nodes, he could reach a consensus that he owned all the bitcoins, and include them in the blockchain. But as the number of nodes grows, this becomes less and less practical.
The real problem is that bitcoin functions without a central authority. So anyone who makes a transaction error in your wallet is not entitled to compensation. If you accidentally send bitcoins to the wrong person or lose your password, there's no one to turn to.
Of course, the eventual advent of practical quantum computing could upend everything. Much of cryptography is based on mathematical calculations that are extremely difficult for today's computers to perform, but quantum computers work in a very different way and may be able to perform them in a fraction of a second.
What is bitcoin mining?
Mining is the process that supports the bitcoin network and also the way in which new coins are created.
All transactions are broadcast publicly on the network, and miners aggregate large collections of transactions into blocks, performing a cryptographic calculation that is extremely difficult to generate but very easy to verify. The first miner to decide the next block transmits it to the network, and if it proves correct, it is added to the blockchain. That miner is then rewarded with a newly generated amount of bitcoins.
The bitcoin software has a hard limit of 21 million coins. There will never be more than that. The total number of coins will be in circulation in 2140. Roughly every four years, the software makes mining bitcoins twice as hard by reducing the amount of rewards.
When bitcoin was launched, it was possible to mine the coin almost immediately using even a simple computer. Now it requires rooms full of powerful equipment, often high-end graphics cards that can do the calculations, which combined with the volatile price of bitcoin can make mining sometimes more expensive than it's worth.
Miners also choose which transactions to aggregate into a block, so the sender adds fees of varying amounts as an incentive. Once all the coins are mined, these fees remain an incentive to continue mining. This is necessary as it provides the infrastructure of the Bitcoin network.
Who invented bitcoin?
In 2008, the .org domain was purchased and an academic white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System was uploaded. It lays out the theory and design of a digital currency system free from the control of any organization or government.
The author, who calls himself Satoshi Nakamoto, writes: "The fundamental problem of conventional currencies is the trust required for them to function. You have to trust the central bank not to debase the currency, but the history of fiat currencies is littered with violations of that trust.
Over the next year, the software described in the article was completed and made public, and the bitcoin network was launched on January 9, 2009.
Nakamoto continued to work on the project with various developers until 2010, when he withdrew from the project and left it in the lurch. Nakamoto's true identity has never been revealed and he has not made public statements in years.
The software is now open source, meaning that anyone can view, use or contribute to the code for free. Many companies and organizations are working to improve the software, including MIT.
What are the problems with bitcoin?
Bitcoin has been the subject of a number of criticisms, including that the mining system consumes a huge amount of energy. The University of Cambridge has an online calculator that tracks energy consumption, and by early 2021 it is estimated that more than 100 terawatt hours will be used per year. In 2016, for example, the UK used a total of 304 terawatt hours.
Cryptocurrency is also associated with crime, with critics pointing out that it is an ideal way to carry out black market transactions. In reality, cash has performed this function for centuries, and bitcoin's public ledger could prove a tool for law enforcement.
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