Bitcoin: A Summary

This video offers a brief explanation of Bitcoin.

Bitcoin is a decentralised digital currency that its developer described as an anonymous, peer-to-peer, electronic payments system. In many ways it functions much like a physical currency such as the US Dollar or the Chinese Yuan. However, there are some important differences between a physical currency and digital currencies like Bitcoin. 

Firstly, there is a limited supply of Bitcoin, whereas there isn’t a limited amount of a physical currency. At any given point in time, there is a limited amount of a physical currency in circulation, but more can be created by the Central Bank in charge of each currency, unlike Bitcoin which has a strictly limited supply. This is because a countries’ Central Bank can simply print more money if it wants to.

Bitcoin isn’t controlled by a Central Bank like physical currencies are. Much like the BitTorrent protocol, Bitcoin is decentralised.

Bitcoin can be ‘mined’ much like you can pan for gold or mine for coal. You do this by getting your computer to solve complex mathematical equations. Solving an equation allows you to ‘discover’ a fraction of a Bitcoin.

Bitcoin also has similarities to physical currencies. These include:

  • Bitcoin can be used to purchase goods and services from vendors who accept it, just like with any physical currency. For example, the popular electronic band Knife Party are accepting payments for their latest album using Bitcoin. There are a wide range of vendors that accept Bitcoin, including WordPress.
  • Bitcoin can be gifted to or traded with others. You can do this using software on your computer or smartphone. As such, it doesn’t require any middleman like transferring physical money through a bank would. As a result of this, the fess for transferring Bitcoin to someone else are much lower than they are for transferring physical money through a bank.
  • Bitcoin can be traded for physical currencies, or vice versa, using exchanges such as Mt Gox or one of the many alternatives. These exchanges work similarly to a currency exchange using physical currencies. (On a side note, Mt Gox has come under fire for acting like a sort of Central Bank for Bitcoin).
  • Storing and using Bitcoin requires either wallet software or an online service such as BlockChain. Each of these storage methods has their own advantages and disadvantages, much like keeping physical money in your wallet compared to holding it in a bank. That isn’t a perfect or completely analogous comparison, however, so take it with a grain of salt.

Bitcoin can be used for many other things as well.

Summary

This is a very broad overview of what Bitcoin is. This definitely isn’t exhaustive by any means, but it’s a good, basic starting point. If you want to read more about Bitcoin, the Bitcoin article on Wikipedia takes a quite in-depth look at it, you can take a look at bitcoin.org, or you can take a look at this document. Alternatively, you can watch this video:

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