Bitcoin digital currency could be in your wallet of the future
Bitcoin – the initial virtual banking currency of the internet – has existed for several years now and many people have questions about them. Where do they come from? Are they legal? Where can you get them? Why did they split into Bitcoin and Bitcoin Cash? Here are the basics you need to know.
What Are Bitcoins?
Bitcoin was the first cryptocoin currency ever invented. No one knows exactly who created it – cryptocurrencies are designed for maximum anonymity – but bitcoins first appeared in 2009 from a developer supposedly named Satoshi Nakamoto.
Because Bitcoin was the first cryptocurrency to exist, all digital currencies created since then are called Altcoins, or alternative coins. Litecoin, Peercoin, Feathercoin, Ethereum and hundreds of other coins are all Altcoins because they are not Bitcoin.
One of the advantages of Bitcoin is that it can be stored offline on a person’s local hardware. That process is called cold storage and it protects the currency from being taken by others. When the currency is stored on the internet somewhere (hot storage), there is high risk of it being stolen.
On the flip side, if a person loses access to the hardware that contains the bitcoins, the currency is simply gone forever. It’s estimated that as much as $30 billion in bitcoins have been lost or misplaced by miners and investors. Nonetheless, Bitcoins remain incredibly popular as the most famous cryptocurrency over time.
How Bitcoins Work
Bitcoins are completely virtual coins designed to be ‘self-contained’ for their value, with no need for banks to move and store the money. Once you own bitcoins, they behave like physical gold coins: they possess value and trade just as if they were nuggets of gold in your pocket. You can use your bitcoins to purchase goods and services online, or you can tuck them away and hope that their value increases over the years.
Bitcoins are traded from one personal ‘wallet’ to another. A wallet is a small personal database that you store on your computer drive (i.e cold storage), on your smartphone, on your tablet, or somewhere in the cloud (hot storage).
For all intents, bitcoins are forgery-resistant. It is so computationally-intensive to create a bitcoin, it isn’t financially worth it for counterfeiters to manipulate the system.
Bitcoin Values and Regulations
A single bitcoin varies in value daily; you can check places like Coindesk to see today’s value. There are more than two billion dollars worth of bitcoins in existence. Bitcoins will stop being created when the total number reaches 21 billion coins, which will be sometime around the year 2040. As of 2017, more than half of those bitcoins had been created.
Bitcoin currency is completely unregulated and completely decentralized. There is no national bank or national mint, and there is no depositor insurance coverage. The currency itself is self-contained and un-collateraled, meaning that there is no precious metal behind the bitcoins; the value of each bitcoin resides within each bitcoin itself.
Bitcoins are stewarded by ‘miners’, the massive network of people who contribute their personal computers to the Bitcoin network. Miners act as a swarm of ledger keepers and auditors for Bitcoin transactions. Miners are paid for their accounting work by earning new bitcoins for each week they contribute to the network.
How Bitcoins Are Tracked
A Bitcoin holds a very simple data ledger file called a blockchain.
Each blockchain is unique to each individual user and his/her personal bitcoin wallet.
All bitcoin transactions are logged and made available in a public ledger, helping ensure their authenticity and preventing fraud. This process helps to prevent transactions from being duplicated and people from copying bitcoins.
Note: While every Bitcoin records the digital address of every wallet it touches, the bitcoin system does NOT record the names of the individuals who own wallets. In practical terms, this means that every bitcoin transaction is digitally confirmed but is completely anonymous at the same time.
So, although people cannot easily see your personal identity, they can see the history of your bitcoin wallet. This is a good thing, as a public history adds transparency and security, helps deter people from using bitcoins for dubious or illegal purposes.