Bitcoin is a digital, open-source, decentralized, peer to peer “cryptocurrency” created in 2009 by programmer Satoshi Nakamoto. Rather than being governed and regulated by a central bank, bitcoin is regulated by an algorithm created by Nakamoto, which limits its production so that only twenty-one million bitcoins (BTC) can ever be produced.
There are currently 6,471,850 BTC in circulation, with a value of $178,493,623, according to Bitcoin Watch.
Instead of having a bank account which a payment recipient delves into, each bitcoin user has a bitcoin address ( for example, 1Nqr3MqVyUp6k3o3QPePAdn4Yg4tzgB9kw) which other users can use to send them the digital currency.
To avoid fraud, each transaction is recorded in a public log, and is verified not by one super-computer, but by the distributed network of bitcoin users, for which “mining”, they earn small amounts of bitcoin. Already CPU intensive, this mining will yield less bitcoin as time goes on.
Jeff Garzik is the founder of Bitcoin Watch and a member of the core team of bitcoin developers. He got involved with the cryptocurrency in July 2010.
“I saw a headline “decentralized currency”, and thought to myself “that’s impossible!” Bitcoin is open source, which means anyone can review those claims for themselves. I reviewed and found it had succeeded in achieving the impossible; a global, decentralized currency with no central bank.
“Bitcoin is unique in many respects; something like it has never been seen before in the monetary world, a global, decentralized currency with no central bank and stable money supply.”
Jeff explains that bitcoin was created in reaction to the uncertainty generated by the financial crisis in the banking system.
“In the “genesis block”, the very first bitcoin transaction ever, Satoshi Nakamoto quoted the following headline [from the Times], “Chancellor on brink of second bailout for banks”. Bitcoin was created as a currency that has a predictable supply, now and in the future.”
As regards how it is supplied, there are, says Jeff, three ways to obtain bitcoin. “You purchase them at a currency exchange, much like you change euro for dollars at the airport. You sell something, and receive bitcoins in return, or you help collectively secure the network’s transactions from counterfeiting.”
The final option, known as bitcoin mining, requires huge computing power to yield any significant quantities of bitcoin, and Jeff thinks that, “for the average person,” it will be the first two options.
“These days, the math problem used to secure the bitcoin network is so difficult that bitcoin miners are largely becoming professionals who own data centers.”
For bitcoin to become a viable alternative to established currencies like the dollar or the euro, it needs a wider adoption demographic than professional miners. So how does bitcoin make the transition from ever so slightly mysterious cryptocurrency to being part of people’s daily lives?
Part of the problem perhaps is a misconception that bitcoin is only for use by subversives and for illegitimate purposes. The publicity surrounding the website Silk Road, only accessible using TOR anonymity software, where illicit drugs can be purchased practically anonymously using bitcoins, has done little to rectify this.
Although bitcoin is decentralized, and as such cannot be controlled by governments, bitcoin’s developers are co-operating with governments in other respects.
“If bitcoin is ever to be successful, the average person needs to feel comfortable holding bitcoins, and the average business owner needs to feel comfortable accepting bitcoins. That means following the laws and regulations we’re all familiar with, in relation to U.S. dollars or euro; you pay taxes on your bitcoin profits and follow laws regarding transfers, etc.
“I think it’s important to point out that the major bitcoin entry/exit points are the bitcoin exchanges, of which the vast majority, bitcoin volume-wise, like Mt. Gox, actively work to stay within anti-money-laundering limits and report suspicious activity, and so on.”
So, although bitcoin represents a step away from the extensive regulation and centralised nature of the banking system, bitcoin is not merely a playground for thieves and pirates.
“The main goal was always a low-cost to use currency with a stable money supply and strong individual privacy, not anonymity from governments armed with lots of funding and court orders. Illegal activity is sent out on the open network for all to see, including law enforcement. Bitcoins are, therefore, slightly more traceable and less anonymous than paper U.S. dollars.”
Its success is far from assured; the danger of hoarding by minersgiven the rapid growth in value bitcoin has experienced in the past two years threatens to undermine its future, and the limit of twenty-one million bitcoins could present economic difficulties; but the momentum of bitcoin is such that cryptocurrency looks set to remain part of the monetary landscape in one form or another.