What is bitcoin?
Bitcoin Origins
In November 2008, the paper “Bitcoin: A Peer-to-Peer Electronic Cash System” was published via the Cryptography Mailing list under the name Satoshi Nakamoto. Some believe Satoshi Nakamoto is a group of people who anonymously wrote the paper.
The paper outlined a concept for a decentralized global payment system and provided the framework for the basis of this new system. It is referred to as blockchain technology and is based on how the transactions are combined into a block, the block is mined through cryptographic hashing using SHA-256 encryption, and then is added to the chain.
The underlying blockchain technology provides the foundation to conduct transactions, including but not limited to bitcoin transactions. This transaction or exchange of value does not require financial institutions or a centralized ledger system to operate. It can be used by anyone who has access to an internet connection.
The concept was specifically developed to operate with no intermediaries or banks, allowing transfers of value between parties that may not know or trust each other, known as a trustless transaction. Traditional money transfers between parties take a few days, and the third party, banks or money services businesses facilitating the transfer may take a portion of the transfer as a fee. Besides being decentralized, bitcoin and cryptocurrency were developed with the intent to reduce transaction time.
Bank wire transfers can take days or even weeks to be received, especially when conducted across borders. With Bitcoin, it takes minutes. Since there are no intermediaries, the cost of those transfers are significantly reduced. Bank transfer fees are often calculated as a percentage of the amount of the transaction. With bitcoin, the fees for a transaction are not based on the amount of the transaction, rather it is the byte size (amount of data) of the transaction.
Types of Virtual Currency
Before we jump into the details of bitcoin, it is important to understand how cryptocurrency fits in with the broader economy. There are two types of currency: Physical (fiat) and Virtual.
Physical currency is legal tender and is backed and regulated by a centralized agency (like a central bank).
Virtual currency is a digital representation of value. It is typically issued by private developers to represent an exchange medium, an account unit, or a store of value. They can be traded digitally and are typically subject to less regulation. Bitcoin is a cryptocurrency, a decentralized type of virtual currency.
Bitcoin Basics
While there are over 6,080 cryptocurrencies on the market currently, bitcoin is the most popular. It was designed to be a “Peer-to-Peer Electronic Cash System” which would make online transactions quick, easy, and private by eliminating the middleman (banks or transfer services) — while minimizing transfer fees.
Today, bitcoin has become so widely used and accepted that you can use it to buy a pizza, pay for clothes online, or engage in illicit activity on the dark web. Due to the anonymous nature of bitcoin, it is more difficult to identify the individual or entity behind a transaction, thus appealing to criminal activity.
Some may use bitcoin to hide online shopping habits, avoid scrutiny for behaviors, or simply want to shop anonymously. There could be completely legitimate reasons people would use bitcoin and want to remain anonymous.
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