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To cut through some of the 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 an electronic concept sort of like a digital IOU. On the other hand, you've got bitcoin-the-protocol, a distributed network which maintains a ledger of balances of bitcoin-the-token.
The machine enables payments to be sent between users without passing through a central authority, such as a bank or payment gateway. It is made and kept electronically. Bitcoins arent printed, like dollars or euros theyre made by computers all around the planet, using free software.
It was the very first instance of what we today call cryptocurrencies, a growing asset class which shares some characteristics of traditional currencies, with verification based on cryptography.
A pseudonymous software developer going by the name of Satoshi Nakamoto proposed bitcoin in 2008, within 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 manner.
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Bitcoin can be used to pay for things electronically, if both parties are willing. In that sense, its like conventional dollars, euros, or yen, which are also traded digitally.
Bitcoins most important characteristic is that it is decentralized. No single institution controls the bitcoin network. It's maintained by a group of volunteer coders, and run by an open network of dedicated servers spread around the world. This brings individuals and groups who are uncomfortable with all the control that banks or government institutions have over their money. .
Bitcoin solves the dual spending issue of electronic currencies (in which electronic assets can readily be copied and re-used) via 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 these 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 worth relative to others. Holders of this currency (and especially citizens with little alternative) keep the price.
While senders of traditional electronic payments are often identified (for verification purposes, and to comply with anti-money laundering and other legislation), users of bitcoin in theory function in semi-anonymity. Since there is no central validator, users do not need to identify themselves when sending bitcoin to another user. When a transaction request is submitted, the protocol checks all prior transactions to confirm that the straight from the source sender gets the necessary bitcoin in addition to the ability to send them.
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In practice, each user is identified with the address of their wallet. Transactions can, with some effort, be monitored this way. Also, law enforcement has developed methods to identify users if necessary.
Furthermore, most exchanges are required by legislation to perform identity checks on their customers before they're allowed to purchase or sell bitcoin, facilitating another way that bitcoin usage can be monitored. Since the network is transparent, the progress of a specific transaction is visible to all.
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This is because there is no this content central adjudicator that can say ok, return the money. When a transaction is listed on the network, and when more than an hour has passed, then it's not possible to change.
While this may 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) at todays prices, roughly one hundredth of a cent. This may conceivably enable microtransactions that traditional electronic money cannot.
Read more to find out how bitcoin transactions are processed and how bitcoins are mined, what it can be used for, as well as how you can purchase, sell and store your bitcoin. We also explain a few alternatives to bitcoin, as well as how its underlying technology the blockchain functions. .
If you want to know what is Bitcoin, how you can get like this it and how it can assist you, without floundering into technical details, this manual is for you. It'll explain how the system operates, how you can use it for your gain, which scams to avoid. It will also guide you to resources that will enable you to store and use your first pieces of digital currency.