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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've got bitcoin-the-token, a snippet of code which represents ownership of an electronic concept type of like a virtual 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, like a bank or payment gateway. It is 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 very first example of what we today call cryptocurrencies, a growing asset category that shares some features of traditional currencies, with verification based on cryptography.
A pseudonymous software developer going by the name of Satoshi Nakamoto suggested bitcoin in 2008, within an electronic payment system based on mathematical proof. The idea was to produce a means of exchange, independent of any central power, that could be transferred electronically in a secure, verifiable and immutable manner.
Bitcoins most important characteristic is that it is decentralized. No single institution controls the bitcoin network. It is maintained by a group of volunteer coders, and run by 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 double spending issue of electronic currencies (in which digital 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. 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 additional info want, and can try to manipulate a currencys value relative to other people. Holders of this currency (and especially citizens with very little alternative) bear the price.
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With bitcoin, on the other hand, the supply is tightly controlled by the underlying algorithm. A small number of new bitcoins trickle out every hour, and will continue to do so at a diminishing rate until a maximum of 21 million has been reached. This makes bitcoin more attractive as an advantage in theory, if demand grows and the distribution remains the same, the value will increase. .
Even though senders of traditional electronic payments are often 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 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 previous transactions to confirm that the sender has the necessary bitcoin in addition to the ability to send them.
In practice, every user is identified with the address of their wallet. Transactions can, with some effort, be tracked this way. Additionally, law enforcement has developed methods to identify consumers if necessary.
Furthermore, most exchanges are required by legislation to perform identity checks on their clients before they are allowed to buy or sell bitcoin, facilitating another way that bitcoin usage can be tracked. Since the network is transparent, the progress of a particular transaction is observable to all.
This is because there's absolutely no central adjudicator that can say okay, return the money. If a transaction is recorded on the network, and when more than an hour has passed, then it's not possible to modify.
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 referred to as 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 an electronic currency, also known as a cryptocurrency. It was invented in 2008 with an anonymous person or group named Satoshi Nakamoto.