New inventions are being made rapidly in the digital age, and one of those new inventions is a digital currency with no central governing body called the Bitcoin.
The Bitcoin is the first digital currency in the world, and it was launched in 2009 by Satoshi Nakamoto.
While not a lot is known about Satoshi Nakamoto, and even the name is a pseudonym, his Bitcoin invention has been in the news lately causing many people to start asking, what is a Bitcoin and how does it work?
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Bitcoins are a type of digital currency that have no central monetary authority. This means that they are not issued by a central bank but rather Bitcoins are supported by a computer network where each computer can act as a server for other computers negating the need for a central server.
Even though Bitcoins are a digital currency, they can be exchanged in many places for traditional currency, and users can also transfer Bitcoins directly over the internet with the proper software to another user with the software.
Due to the ability to transfer between users, Bitcoins have the potential to attract people completing international transactions particularly because there are no bank charges to make an international transfer and the fluctuating exchange rates do not affect them.
However, there are still drawbacks to using the Bitcoins today because the value of the Bitcoin fluctuates greatly.
This fluctuating rate has been apparent in the recent news, and Bitcoins have attracted a lot of attention recently due to the quick rise and fall in their value.
In early February, the Bitcoin was worth only $20.00. It then rose rapidly to $250.00 before quickly falling back down to only a $150.00 value.
The unstable value is one of the drawbacks to using Bitcoins for most potential users. Until the value stabilizes, it is unlikely the Bitcoin will be used for purposes like international transactions.
On the other hand, another possible use of the Bitcoin is criminal activity. The Bitcoin has a complex system that could hide exchanges such as money laundering and illegal drug sales.
Drawbacks such as these decrease the likelihood of using Bitcoins as a viable type of currency.
Understanding the system and software is based on how the Bitcoin really works. Because the Bitcoin has no central monetary authority, there would be no way for a central bank to issue new Bitcoins to decrease the value of those that already exist in circulation.
Additionally, Bitcoins are “mined” by the peer-to-peer network executing number-crunching tasks.
The system was designed mathematically to become progressively more difficult to “mine” the Bitcoins, and no more than 21m Bitcoins total can ever be mined.
The network itself is how the Bitcoins are monitored and verified as new ones are mined.
There is a log that is accessible to the entire network which uses participating machines to create and agree on all official log updates of newly mined Bitcoins summarizing the mining process.
Once a user updates the log and has been approved by the network of machines, he or she is given a fixed number of new Bitcoins.
Currently, the number of Bitcoins that a user is given is fixed at 25 Bitcoins for successful log updates.
This system has greatly encouraged users to build extremely powerful computers, and it also has encouraged nefarious users to hijack other people’s computers in order to receive a greater number of Bitcoins via mining.
While the Bitcoin system is complex and difficult for users currently, they are likely just the first digital currency in the field of virtual currencies.
Some internet services such as web hosting and online gambling can already be paid in Bitcoins, but currently, most have not adopted it as a means of currency due to the complexity.
Similar to the way that BitTorrent and Skype are run on peer-to-peer computer networks from their users and were not the first file sharing or internet voice over systems, Bitcoin will most likely be obsolete due to new and easier to use rivals that will be added to the virtual currency scene.
Even though it is a complex system, it is possible to answer the most basic questions of what is a Bitcoin and how does it work effectively.