With commerce relying extensively on third-party financial institutions for processing transactions (often charging exorbitant amounts of money to do so) few would have thought there could exist a completely direct method of transacting without the need of a ‘middle man.’
But, there does.
A mysterious unknown entity, with the alias Satoshi Nakamoto, first introduced this remarkable invention in a white paper published back in 2009.
Bitcoin, at its simplest, is an electronic cash system that provides a secure, inexpensive and irreversible way of handling transactions, independent of a central authority such as a bank.
Behind Bitcoin’s architecture are two technologies:
Firstly, the Bitcoin blockchain, which is a network of computers (nodes) that maintains a constantly updated digital ledger of transactions. This ledger is open to public, not under the control of a specific entity, and is distributed across the entire network. And secondly, the bitcoin cryptocurrency, which is a digital currency secured with mathematical algorithms to ensure it cannot be counterfeited, tampered or produced more than a set number.
(Fun fact: Bitcoin refers to the technology, while bitcoin is the virtual currency.)
The two combine in a brilliant manner to allow for peer-to-peer transactions: The blockchain technology serves a platform to provide the means to transact with one another using cryptocurrency.
Bitcoin exchanges allow people to buy or sell bitcoins, and these bitcoins are stored on an electronic wallet. Transactions are sent and received through addresses with electronic signatures to ensure privacy and security. Each transaction, on a ‘block’, is verified by ‘miners’ on the network who solve complex cryptologic problems. The first one to finish receives a small monetary reward. If everything checks out, the transaction is complete and updated on the ledger thereby maintaining its integrity. Cha-ching!
But, the beauty of Bitcoin lies in its ideology:
It is an anonymous, secure, and fast means of transferring cash, with the plus point of charging a minimal transaction fee, and working anywhere and anytime.
Real-world identities are protected by addresses, a chain of random characters, hence providing a greater degree of anonymity. It is secure as the distributed ledger is being updated every second, uses military grade encryption, AND prevents a central point of failure because of its decentralized and distributed nature. It is fast, because transactions are confirmed in just a matter of minutes, and since it works on a universal network it doesn’t matter whether you send transactions to London or Lahore, or whether at 1am in the morning or 2pm in the afternoon.
Unlike fiat money, bitcoins aren’t controlled by a specific authority, and are programmed to decrease in production every year- This ensures a controlled supply. (FYI: There will be no more than 21 million coins in circulation). Moreover, transactions are set in stone, i.e. immutable/ irreversible; a transaction cannot be reversed once sent, further making them tamper-proof. The smallest unit of bitcoin is called a ‘satoshi’ and is one hundred millionth of a bitcoin, thereby also enabling micro-transactions to occur. But, the best part? ANYONE can use bitcoin! You just need the software and an internet connection.
However, with such great power (ease?) comes great responsibility. Which, unfortunately, isn’t always mankind’s greatest strength. Misuse and misconception has dragged Bitcoin’s name in the mud.
The high level of privacy and lack of KYC (Know Your Client) regulations provided by the system potentially leads to illegal and criminal activities such as money laundering schemes, and often leaves taxation issues still undetermined. Additionally, the volatile nature of bitcoin means a stock market value of almost $20,000 for a period of time, only to fall at $8000 the other day- as is the case that happened recently. Other times, hackers can corrupt exchanges to siphon all your money. Sometimes, the fortunes of the “leaderless” Bitcoin are still being tied to the decision-making of state leaders, often leading to panicky pull out by investors.
While most still speculate Bitcoin being nothing more than a bubble, it has gathered much attention and interest over time- Especially when its stock market value reached an all-time high the previous year. Bitcoin has even paved the way for other cryptocurrencies and decentralized applications to emerge, such as Litecoin and Ethereum respectively. So, whether it’s purchasing video games, looking for an investment, buying gifts for your loved ones, booking airline tickets, or even ordering dinner, bitcoins are slowly but surely transforming economy everywhere.