Bitcoin is a digital currency, a form of money that stores in its online “virtual” wallet, without governments or central banks control.
Bitcoin was first introduced in 2009 by someone under the pseudonym of Satoshi Nakamoto, who wanted the virtual currency not to be restricted by any regulators.
Thus, cryptocurrencies are an attempt to replace money transactions, using peer-to-peer networks, with a digital exchange nature. Bitcoin was the first decentralized cryptocurrency, and still the most successful.
The idea is that you would manage the creation and transfer of money using cryptography, rather than hoping for central authorities and their regulation.
Against the backdrop of Bitcoin’s success, more than 3000 other virtual currencies later creating with varying success and popularity, like Ethereum, Litecoin, Monero and Dash.
Many cryptocurrencies have disappeared due to lack of interest and the simple fact that no one has used them. All the remaining non-Bitcoin cryptocurrencies, still known as altcoins, are more or less based on the same idea of a decentralized digital mean of exchange.
Their success depends on how much “cash” (total cost of transactions) is in the peer-to-peer network (i.e. virtual economy). Since Bitcoin is an open source code, everyone can develop their own cryptocurrency using this technology.
Part of the Bitcoin value is determined by their deficit. You can buy Bitcoins online at cryptocurrency exchanges or you can get them through a process known as “mining”.
Bitcoin’s mining programs compute an encryption function, called a hashrate, over a set of random numbers. Coins are awarded regardless of who of the miners performs the calculation of a number below a certain threshold.
Initially, Bitcoin mining took place using standard PCs with powerful GPU, but as hashrate complexity increased, Bitcoin ASIC’s preferred method for Bitcoin mining was the use of a chip specifically designed for this one.
Now in circulation there are about 17 million of Bitcoins. Please note that the system was so developed that the total number of Bitcoins in (virtual) circulation will never exceed 21 million.
As the Bitcoin network grows, the hashrate calculation becomes more complex, with the miners receiving less reward, so they always need improved hardware and higher Bitcoin prices to keep this process profitable.
As a currency, Bitcoin is still a niche market. But, nevertheless, several retailers such as Overstock, Expedia, Newegg and Dish Network, accept it as payment.
Because Bitcoins can be spent on the Internet without using a bank account, they thus provide a convenient system for anonymous purchases, which also allows money laundering and buying illegal products. Since there is no physical money anywhere, accounts can not be frozen by the police or PayPal administrators.
From the point of view of use on the Internet, Bitcoin and other cryptocurrencies are considered money of the future. Although over the past few years Bitcoin has demonstrated both ups and downs.
Bitcoin was once considered an ideal system for small electronic payments – so-called micropayments – as it is difficult to effectively transfer small amounts using existing systems. A credit card commission, also known as “swipe fees”, can often exceed the cost of the purchase itself, which makes it costly for retail customers. Nevertheless, the increase in transaction fees in Bitcoin was an obstacle to its penetration into the world of micropayments.
Another Bitcoin problem is the its volatility, which exceeds the volatility of other currencies and gold, which leads to huge fluctuations in comparison with the US dollar. In 2013, the cost of Bitcoins increased from $ 10 to more than $ 1000! Since his offer is ultimately limited, prices should change depending on the change in demand, and not vice versa. Unlike gold, Bitcoin does not receive intrinsic value from alternative uses that could consolidate its price.
Bitcoin existed for a while, then there was one of the first bursts in its price, which is largely due to the economic crisis in Cyprus. This cryptocurrency unexpectedly offered a more attractive way of placing money with the promise of providing constant access to them.
While the scope of such application was being discussed, it was this spark that lit the wick. Dr. Vili Lehdonvirta, economist, sociologist and researcher of virtual economies at the London School of Economics, recalled that the real culprit for this development was the media.
A limited number of Bitcoins means that inflation simply does not happen. Thus, intrigue leads to demand, and the only way is the way up.
“The question is,” Lehdonvirta said at the time, “how many people buy Bitcoin to use it as a method of payment, and how much they buy, because they hope that the price will continue to rise?”
But, with so many people wishing to make quick money, a bubble burst seems just inevitable. More and more people want to get their piece of pie from Bitcoin, despite the fact that the currency is accepted only by a small but still growing number of outlets.
“What Bitcoin needs to achieve is a wider recognition as a means of payment and as a mechanism for exchange,” said Lehdonvirta. “Until this happens, this kind of value that grows because of people who hope to save money in a safe place and not pay taxes will not be sustainable.”
The cryptographic method on which Bitcoin is based is the same method that commercial banks use to ensure the security of their transactions.
“The fact is that Bitcoin was purposefully designed so that no one could control it,” added Lehdonvirta. “There is a built-in algorithm that determines the number of Bitcoins in circulation at any given time.”
So from a technical point of view it should be pretty cool. But there are always risks, and if you could use loopholes, then this could lead to terrible consequences.
And it was precisely because of these risks that Bitcoin got into the headlines when the Mt.Gox exchange underwent a DDoS attack, which a group of hackers conducted a few years ago, when Bitcoin’s value fell sharply.