Bitcoin is a digital currency. Like other currencies, you can use it to buy things from shopkeepers that accept it, such as Overstock.com, or, as is more often the example, hold on to it in hopes that it will increase in value. Unlike traditional currencies, which rely on governments and central banks , no single entity controls bitcoin. Rather, it is supervised by a worldwide network of volunteers who maintain computers operating specialized software. As long as people operate bitcoin software, the currency will keep working, because everything needed to keep it operating is stored in a distributed ledger called the blockchain. And even though it’s all digital, bitcoin is scarce.
Its most wild-eyed proponents belief bitcoin’s decentralized, cryptographic approach to currency can yield a host of benefits: restriction central bankers’ ability to damage economies by publishing too much fund; eliminating credit-card fraud; bringing the unbanked mass into the modern economy; devoting people in unstable economies a safe place to park their money; and stimulating it cheap and easy to transfer monies. But bitcoin has yet to realize these goals, and critics argue it is likely to never live up to the hype.
When you mail or receive bitcoin, your bitcoin software, referred to under as a “wallet, ” records the transaction in the blockchain. The blockchain shall be managed by, and distributed across, the roughly 200, 000 computers operating bitcoin software. If someone tries to alter the ledger to make it look like they have more bitcoin than they’re supposed to, the tampering will be apparent because it won’t match the other two copies of the blockchain.
People who devote the computing resources to processing bitcoin transactions are paid in bitcoin, but only if the computers they operate are first to complete complex cryptographic puzzles in a process called “mining.” New bitcoins are created automatically by the software and awarded to the winners of the race to solve these puzzles. As of February 2018, that accolade is 12.5 bitcoins. By design, simply 21 million bitcoins will ever be created. Those who process transactions can also collect costs; the fees are optional and set by the person who initiates a transaction. The larger the cost, the faster the transaction will likely be completed. This system keeps bitcoin scarce while rewarding people for the investment in the infrastructure required to keep a world payment-processing system operating. But the mining process comes with a big catch: It uses a huge amount of electricity.
Adoption of the cryptocurrency has been hobbled by a series of scandals, high-tech heists, and disputes over the software’s intend, all of which represent why financial regulations were created in the first place. The bitcoin community has solved some mind-boggling technological difficulties. But constructing bitcoin a true-life replacement for, or even adjunct to, the global fiscal system involves more than just great tech.