Millions of people conduct all kinds of economic transactions online. However, until recently, digital transactions were always tied to “real” money and existing banking systems. All that changed with the advent of Bitcoin, the world’s first decentralized and truly digital currency. Bitcoin uses the distributed power of the internet and the resources of cryptography. It lets users safely send and receive money to and from businesses and other individuals worldwide. This article will answer the question “What is Bitcoin?” and explain the risks and benefits of this entirely digital money.
What Is Bitcoin? – The Concept
Like any other form of currency, Bitcoin’s purpose is to allow real people to exchange goods and services. Before Bitcoin, even online transactions required some connection to the ordinary financial system. With Bitcoin, however, users both produce and exchange the currency entirely on the internet. In other words, Bitcoin is not a stand-in for “real” money. It is a whole separate system of money in its own right.
Bitcoin’s creator is an individual or group operating under the pseudonym “Satoshi Nakamoto.” They published the proposal for the new currency to a cryptography mailing list in 2008. Despite its peculiar origins, today many millions of people use Bitcoin for ordinary transactions. There are more than 100,000 vendors willing to accept it as payment.
But what is Bitcoin’s digital currency system? Bitcoin is basically a giant peer-to-peer network in which users exchange “coins” with each other directly. The record of every transaction within the Bitcoin network is referred to as the “blockchain.” Individual “bitcoins” are the units of account in this record.
Participants can create these units through a process called “mining.” Through this process, they lend their computer power to the maintenance of the system. They receive bitcoins in exchange. Each bitcoin user has an “address” that is identified by a public and a private “key.” The larger system uses these keys to keep track of which “addresses” hold which coins.
Since this publicly-verifiable key system keeps track of the coins, and since no one person controls the system, Bitcoins cannot be counterfeited, stolen or lost. Most users of Bitcoin take advantage of online systems called “Exchanges” and “Wallets” to record, organize, and exchange their coins.
The system can seem complicated and newcomers may still scratch their heads and ask what is bitcoin. Nevertheless, it has proved both usable and secure. Also, it has been growing steadily since its introduction.
Advantages and Disadvantages of Bitcoin
While trusting money to a cutting-edge, decentralized internet system might make some people nervous, Bitcoin has many devoted users. Expert financial opinion remains divided about the long-term prospects for Bitcoin. However, the currency is fully functional as a method to send and receive payments for a wide variety of goods and services. Here, we’ll highlight some of the major advantages and disadvantages of Bitcoin. We will also help you decide whether to try this new form of distributed financial exchange. All that apart from answering what is bitocoin.
Advantages of Bitcoin
With Bitcoin, you are taking the freedom provided by credit cards and other electronic payment methods to the next level. Besides its independence from physical money, Bitcoin doesn’t rely on any existing banking system or national currency. Borders, holidays, exchange rates, and other limitations don’t have any impact. You can pay for anything at any time.
Bitcoin provides unprecedented security and anonymity. While many Bitcoin Wallet services require registration and may have stronger or weaker security features, advanced users can take advantage of extremely strong anonymity and cryptographic security. Backup and encryption features protect the Bitcoins themselves. You can be sure that your transactions are both solid and isolated from your personal information.
- Low Costs
Since the inherent security features of the Bitcoin network protect merchants as well as customers, many vendors who accept Bitcoin ask for few or no fees to cover the process. The Bitcoin system is very difficult to cheat. Therefore, merchants can feel more secure making anonymous or online transactions.
Disadvantages of Bitcoin
- Technical Complexity
While there are many services out there to streamline the use of Bitcoin, the system can be daunting to new users. There is a significant learning curve before most customers or vendors are comfortable with trusting their transactions to this novel currency. Bitcoin mining now mostly requires specialized hardware and is out of reach for many ordinary users of the currency.
- Limited Acceptance
Most merchants and vendors do not yet accept Bitcoin. Either because of technical issues or skepticism about digital currencies in general, universal acceptance of Bitcoin is still a distant prospect. So, while some of your favorite online merchants may use the currency, many others will not. Therefore, your options may be significantly limited.
- Still in Development
Bitcoin is a tested currency and is used for millions of successful transactions. However, in historical terms, it is still in its infancy. Refunds or guarantees may not be available. Likewise, because of the novelty of the system and its use for black market transactions, regulators have taken an interest in the currency. What moves, if any, governments will make with respect to Bitcoin is still unknown.
In less than half a century, almost every aspect of our economic lives changed because of the internet. More people shop online today than ever before, but a truly digital currency has yet to displace old-fashioned money and credit cards. Whether or not Bitcoin will ever replace traditional currency, it’s already making an impact as a secure, effective alternative for all kinds of purchases.
Have you answered the question “What is Bitcoin” for yourself? Share your thoughts on this digital currency system, its risks and benefits, and advice for new users!
Image Source: 1