Bitcoin is a new form of virtual currency (in fact a cryptocurrency) that relies on the Internet. It has several characteristics that taken together, could revolutionize how we pay for things online or in the physical world.
From a high-level point of view, Bitcoin is a network of computers that run specific software and exchange tokens of value called bitcoins. Those computers communicate mostly via the Internet. Some call Bitcoin the “Internet of Money”.
Bitcoin vs bitcoin
A bit of terminology here: Bitcoin with an uppercase B denotes the technology whereas bitcoin with a lowercase b denotes the currency.
Bitcoin Client Software
Everybody can install Bitcoin software on his computer or his smartphone, and so participate in the Bitcoin network.
Once Bitcoin software runs on a computer or smartphone, this device becomes a so-called node of the network, a bit like installing email software on your computer allows you to send email to every other computer on the Internet.
In fact, Bitcoin Core is a reference implementation. It is developed by the same people that contribute to the development of the Bitcoin network.
However, the Bitcoin Core Client is a so-called full node and needs plenty of resources to run. A full node keeps a copy on your computer of all transactions that ever happened on the Bitcoin network.
So if your computer is a bit dated, it could lack the resources to run the Bitcoin Core Client. Other Bitcoin clients exist that consume fewer resources.
Bitcoin is a Cryptocurrency
Bitcoin is a cryptocurrency because it relies on cryptography to validate transactions that occur across the network.
Cryptography has two uses:
- Cryptography allows sending messages in a secure way across an insecure channel by encrypting messages so that they can’t be read by a third party. Only the recipients that possess a special code (the so-called private key) can decrypt the messages.
- Cryptography allows to unequivocally determine that messages were sent by a specific party because that party signed the message using a special code (again, the so-called private key).
Bitcoin uses cryptography to sign transactions so that the sender of funds can be unequivocally determined and the transaction can be assumed to be valid.
Bitcoin is Decentralized
The fact that anybody can install a Bitcoin client on his computer and participate in the network is one of the characteristics that make it a decentralized technology.
Another characteristic is that the Bitcoin network is peer-to-peer. Once you run a full node client on your computer, it can communicate with every other Bitcoin client on the Internet and has access to the full set of possibilities of the Bitcoin network.
The evolution of the Bitcoin technology is not controlled by a single entity, neither a government nor a corporation, but happens by consensus. Anybody can propose improvements to how Bitcoin clients exchange information (the so-called Bitcoin protocol) and program a Bitcoin client that implements those changes.
If enough Bitcoin users install and run this new improved client (more than 51% of all nodes of the network), it defines the new de facto standard how all Bitcoin clients must communicate.
Bitcoin Mining Creates Bitcoins
Now you may ask, who creates these tokens of value called bitcoins? Well this is another characteristic of the Bitcoin technology.
Bitcoins aren’t created by a central entity and didn’t exist at the creation of the Bitcoin network either, at least at the start of Bitcoin time.
In fact, bitcoins are mined. Computers on the Bitcoin network configured as miners are given a complex computation to solve, and the first computer to solve the problem gets a reward in form of newly created bitcoins.
On average, the reward is attributed every ten minutes to a computer of the Bitcoin network, the one that has solved the computation problem.
The amount of bitcoins awarded every 10 minutes is currently (as of December 2016) 12 bitcoins and halves every four years.
There is a fixed limit of the amount of bitcoins that will ever be released, which is 21 million.
You might say, this is all well and good, but why should I bother? What are the advantages of Bitcoin? Well here are a few advantages Bitcoin has over other payment methods:
- Very quick transmission of funds across the globe (currently, about on hour, and in the future, nearly instantly).
- Low transaction fees, especially if you want to send funds to another distant country.
- Bitcoin as an investment: as the interest in Bitcoin technology and its adoption rate increases, so does the value of individual bitcoins.
- Defense against currency devaluation: Bitcoin usage is currently increasing in India, Venezuela and China because their currencies are devaluing a lot. Citizens of those countries are buying bitcoins as an alternative to Gold to keep their purchasing power.
That being said, Bitcoin has also disadvantages, for example:
- It is a young technology that could fail. This means that if you buy bitcoins, their value could drop to zero.
- Bitcoin network capacity hitting limits. The Bitcoin network was initially designed with a certain set of assumptions about the maximum number of transactions it could handle per minute. The Bitcoin network is growing and currently getting close to those limits, but there are extensions in development to increase the network capacity.
- Cyber theft: If a user’s computer gets infected by a hacker, it is theoretically possible for the hacker to steal funds from the Bitcoin client. However, solutions exist to make it more difficult for an attacker to steal your bitcoins.
I hope this high-level overview of Bitcoin has made a few things clearer. Subsequent articles will discuss each topic in more depth. If you have any question or comment, don’t hesitate to leave a message below.