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To cut through some of this confusion surrounding bitcoin, we need to divide it into two components. On the one hand, you've got 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 system enables payments to be sent between users without passing via a central authority, like a bank or payment gateway. It's created and kept electronically. Bitcoins arent printed, like dollars or euros theyre produced by computers all around the world, using free software.
It was the first instance of what we call cryptocurrencies, a growing strength class that shares some features of traditional currencies, together with verification based on cryptography.
A pseudonymous software programmer going by the name of Satoshi Nakamoto suggested bitcoin in 2008, as an electronic payment system based on mathematical proof. The idea was to generate a means of exchange, independent of any central power, which could be transferred electronically in a secure, verifiable and immutable way.
Bitcoins most important feature is 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 committed servers spread around the world. This attracts individuals and groups that are uncomfortable with the control that banks or government institutions have over their money. .
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Bitcoin simplifies the dual spending issue of electronic currencies (in which digital assets can easily be replicated and re-used) through 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 attempt to manipulate a currencys worth relative to others. Holders of the currency (and notably citizens with very little alternative) bear the price.
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With bitcoin, on the other hand, the supply is closely 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 attained. This makes bitcoin more appealing as an advantage in concept, 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 comply with anti-money laundering and other legislation), users of bitcoin in theory function in semi-anonymity. Since there's absolutely no central validator, users do not need to identify themselves when sending bitcoin to another user. When a transaction request is filed, the protocol checks all previous transactions check these guys out to confirm that the sender gets the necessary bitcoin in addition to the ability to send them.
In practice, each user is identified with the address of their pocket. Transactions can, with a little effort, be tracked this way. Also, law enforcement has developed methods to identify consumers if necessary.
Furthermore, most exchanges are required by law to perform identity checks on their clients before they're allowed to purchase or sell bitcoin, facilitating another manner that bitcoin usage can be tracked. Since the network is transparent, the progress of a specific transaction is visible to all.
This is because there is no central adjudicator that can say okay, return the money. If a transaction is listed on the network, and if greater than an hour has passed, it's not possible to change.
Even though this might disquiet a few, it does 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's one hundred millionth of a bitcoin (0.00000001) in todays prices, over at this website roughly one hundredth of a cent. This may conceivably enable microtransactions that traditional electronic money cannot.
Bitcoin is an electronic currency, also known as a cryptocurrency. It had been invented in 2008 by an anonymous person or group named Satoshi Nakamoto.