A Bitcoin is a currency started in 2008 by Satoshi Nakamoto. The creation and transfer of the “coins” is based on a complex cryptographic protocol. A protocol is just a set of rules which are exchanged before data is transmitted to ensure the person receiving the information is the correct person. Bitcoin also doesn’t have a central authority that oversees the creation and transfer of it. These coins can be traded through computers and smart phones using a “Bitcoin client” with no intermediary.
The transactions of Bitcoin are done through servers known as “miners” which are internet based. These “Miners” keep track of transactions on a ledger that is constantly updated and archived through peer-to-peer file sharing.
New Bitcoins are created when the ledger updates. Number of Bitcoins halves every 4-years. By 2140, this number will round down to zero and no more Bitcoin will be produced. The maximum number of Bitcoins in circulation is 21 million.
Why does the world need another currency?
We currently have the US Dollar and the Euro as a world currency however, the purpose of Bitcoin is to create a universal currency for people to trade within the digital world. Below are a few other reasons why Bitcoins was created:
- To help and prevent any issues related to fluctuating currency rates that we see with the Euro and US Dollar.
- To stop the problems that happen in stock and foreign exchange trading
- Privacy (you are completely anonymous if you are making a transaction using these coins)
- Decentralized (no control by any person or any entity)
These problems are eliminated because no government or exchange regulates this currency. Only computers can regulate it and this seems to be the reason why it can’t be manipulated.
Two ways people can trade Bitcoins, Manually & Droid. The few differences are that if you trade Bitcoins manually, it requires skill and time. If you trade it using a robot, it doesn’t require skill and it doesn’t take up any time except internet, electricity and a computer that runs 24 – 7 – 365 days.
It turns out that these Bitcoins have become popular and are being accepted by many merchants. Another interesting thing that was a result of the popularity of Bitcoins is that they can now be converted to US Dollar, Euro, Yen, etc… One of the most popular exchanges is Mt. Gox.
From my understanding, currency is a reflection of the faith and credit of a fully functioning government. The greater and the more faithful a government is, the more value its currency has. This raises the question, how do we value Bitcoins?
If you would like more information on Bitcoins please follow Sara Eisen at Bloomberg LLP because she has written some great articles on Bitcoins.
Please be advise that I am not involved in the trading of Bitcoins or plan to do so in the near future.