You might have heard about the new virtual currency called “Bitcoins”. But what is it? And how does it work?
In the simplest terms, bitcoins is a form of digital currencies that are generated outside of any government’s control. The originality of this technology is that it works exactly like any other form of currency you can imagine – from the US dollar to the Japanese yen. But unlike traditional currencies, you do not need to carry physical bills around with you anymore – you can simply make use of the internet and your computer. There is no centralised bank that prints these coins.
What makes bitcoins so special is that it possesses all the properties of other traditional currencies. For instance, it has a limited number of coins that will be issued in total. No matter how many people start using it, the supply will remain fixed and it cannot be printed more than 21 million. Beyond this, however, the value of each unit of bitcoin is entirely based on the demand and supply model, which ensure that there is scarcity, just like gold and silver.
So how does it work? Let’s say you want to buy a little extra cash now. You visit your local ATM machine and you see that there are only a couple of dollars left. You ask the clerk for some spare cash, and he tells you that you can’t get it now. This means that no matter how much you want to buy now, you can’t. This is because the supply is finite and there are no more precious metals left to be issued.
Unlike conventional fiat currencies, which are backed up by the power of a central bank, bitcoins are actually issued via an encrypted network called the “blockchain”. This is similar to the way online banks ensure that all transactions are secure – by making use of ” cryptography “which scrambles up the data and prevents it from being read by third parties”. The main difference between the two is that when you make a payment with a conventional bank, they guarantee that the transaction is secure and that the money will be transferred into your account without you ever having to access the details yourself.
With bitcoins, you need not worry about anything like that because the entire transaction is done online and is therefore traceable. Transactions are recorded in the form of “blocks”, with each block containing the information of the previous block, plus the date of creation. This is how the bitcoin system works – every transaction you make is recorded and is secured by the cryptographic methods used. Unlike traditional money, it’s completely safe and does not have any kind of governmental regulation in place. It’s also very easy to understand, and has the same kind of ease of use as any other digital currency.
So why is there an argument that the bitcoin system cannot be accepted globally? Simply put, there is no central body or regulator that controls the circulation of bitcoins. Bitcoins are a fungible asset, meaning that like a commodity (say gold) they can be traded over the counter (OTC). This makes them eligible for usage around the world by any person with an internet connection. Just as physical gold can be traded between different counties, so too can bitcoins be traded internationally.
The problem with the argument that is usually made against bitcoins is that they are not truly decentralized like the underlying fiat currencies. While the bitcoin network works as a globally-verifiable and censorship-resistant ledger, there is no central authority or institution that controls the protocol. As a result, the protocol that governs the growth and development of the bitcoin ecosystem is known as the “bitcoin protocol”. While this kind of decentralization is desirable in a new kind of economy based on a global market, it is certainly not desired when it comes to traditional, government-issued currencies. With that said, the core purpose and function of the bitcoin system remains one of the biggest attractions and reasons for its increased popularity – the ability to move money around the world without relying on a third party or the issuing government.