Although Bitcoin is one of the most searched terms on Google, many still find it a bit mysterious or hard to understand. In the following lines we’ll explain in simple words what is Bitcoin and why it has spread rapidly the last years. But, before we talk about Bitcoin it would be really helpful to talk about money.
Evolution of Money
Money at it’s core represents value. You give money to someone in exchange for the value he gave you. Throughout history many materials, such as wheat, salt gold and more have been used instead of money. However, overtime it was complicated to carry these materials so they invented paper money. The bank or government would offer to take possession of your gold and in return would give receipt certificates that represent the value of the gold. You could get your gold back by simply getting to the bank the value of gold in receipts. So people started using paper money as an instrument of convenience.
With the passage of time, the bond between paper money and the gold it stands for was broken and we left the gold standard behind. The governments promised people that they would be liable for the value of the paper money ad people kept on trading with receipts that are backed by just the government’s promise.
But how did it continue to work? Because people trusted the governments and that’s how fiat money was created and expanded to all transactions. However, fiat money has 2 downsides. It’s centralized, as it is controlled by the government or the central bank and it’s not limited by quantity.
The central authority that controls fiat money can print more money and feed the market when they evaluate that this is necessary. This creates a serious problem which becomes more apparent over time. When the market is flooded with more money, your money lose value. This is why you see prices rising, while in reality, your money lose purchasing value.
The Double Spend Problem
Once we have fiat money, the transition to digital money was the next step. In this case, dollar or euro is being represented by a file and the central authority keeps record who owns those money.
Each user has an account and can see what’s going on in his account but not outside of this. This means that we trust the authority and they trust the computer. But what keeps them from just copying a file and having as much money as they want?
When it’s so easy to create money, society becomes corrupted. This is the point where the need arose for the creation of a decentralized system.
What Is Bitcoin
Back in October 2008, there was a document published online (a whitepaper) by a guy or a team of people who proposed a new decentralized currency that solved the problem of double spending. This currency was called Bitcoin.
Bitcoin is a digital currency. Digital money that can be sent from one to another without any authority involved. Each Bitcoin is created after a computer works hard to solve a math problem, spending energy and time.
After the creation of each Bitcoin, it’s added on a public record that’s called Blockchain. Every piece of this puzzle is unique and if someone tries to copy it, it will be rejected by the network.
There can only be 21 million bitcoins, so it’s impossible to inflate the market. There are 2 ways to acquire bitcoin, to create it by mining or buy it from someone who owns it.
Today millions of people around the world use Bitcoin and can send it instantly to each other with low fees without any authority involved. And as Bitcoin cannot be copied, the more people use it, the more valuable it becomes.
The Advantages of Bitcoin
The main advantage of Bitcoin is transparency. At any time you can see every transaction that takes place or any balance, but you cannot figure out who sends or who receives Bitcoin. Every computer that takes place to the system keeps a copy of the ledger and that’s why you cannot hack the system, as you should take down instantly thousands of computers.
With Bitcoin you are the only one who can access your funds and no central authority can decide to freeze your funds of foreclose your savings.
Finally, Bitcoin opens the road to online commerce for billions of people around the world who might not have access to the current banking system with just a smart phone and a few clicks.
Disadvantages of Bitcoin
Although Bitcoin has gathered a lot of attention due to it’s innovations and creative approach to finance, there are still a few drawbacks that you should have in mind, whether considering to use it as investment or means of payment.
Volatility is a significant disadvantage of Bitcoin, which could affect its adoption as a stable currency. In some cases price fluctuations of up to 15-20 might happen in a single day, making it perfect for traders but at the same time, unreliable for financial planning.
Transactions in Bitcoin cannot be reversed. This is a huge problem, in cases of human error, such as sending btc to the wrong address, or typing a wrong amount. Unlike traditional payment systems, Bitcoin does not offer a way to issue refunds, increasing risks for users, particularly in cases of fraud.
Conclusion
Bitcoin is a decentralized digital currency that operates on a p2p (computer to computer) network. It uses blockchain technology to offer secure and transparent transactions, enabling users to send, receive or store value around the world without the involvement of central authorities.
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