Bitcoins are a type of digital currency that can be created via a free software application and transferred across the Internet without the use of financial institutions or clearinghouses. This means that there is no physical form of this currency; it is not like a U.S. Dollar or a Euro, or even like a piece of gold or silver. You cannot touch Bitcoins and be in physical possession of them like you can those aforementioned physical currencies.
The best way for you to understand digital currency is by thinking of it as a code. The strength of the code makes the currency stronger. Cryptography ensures that the code cannot be accessed without proper authorization. This code has never been broken, though many people have tried!
How can Bitcoins be used then? A computer, Smartphone, tablet, or any device with Internet access can easily transfer Bitcoins from one person to another, even in transactions between a user and a business website. The number of bitcoins you have is stored in your “digital wallet,” which is similar to screens you see when you use online banking forms to authorize transactions.
When a Bitcoin transaction occurs, the bitcoin miners communicate over a Web-based network and add the transaction to transaction logs that record all Bitcoin transactions.
Peer-to-peer file-sharing technology allows all transactions to be processed and documented. An electronic signature is added, allowing the transaction to be stored on the Bitcoin network. This transaction is free for all to see, though you can use multiple bitcoin accounts and not transfer large amounts of bitcoins to each account in order to help camouflage your activities. This hides your accounts from other Bitcoin users, so they do not know which accounts are yours.
Bitcoin is unlike other currencies because it is decentralized; no one agency (world or national) controls the regulation of it. You may think because Bitcoins are a digital currency that there would be an unlimited supply of them, much like the space on a digital or virtual server.
However, thanks to a schedule planned by Bitcoin itself, there will be 21 million bitcoins in the year 2140. This number will be reached by each update being reduced by half every four years until 2140. At that time, there will be no more Bitcoins mined.
To further ensure that the exact number of 21 million Bitcoins will be in circulation in 2140, each Bitcoin is broken down into eight decimal places, leading to 100 million smaller units being created, known as “satoshis.” The name is based on the founder of Bitcoin, a software developer named Satoshi Nakamoto. Many people think that this name is a mask and helps to hide the true creator of the software.
When “mining” is mentioned, this means that the free application that creates the Bitcoins is automatically adjusted to ensure that the bitcoins are mined at a predictable and limited rate. There is a certain amount of processing work done by the bitcoin miner, allowing the network to control the exact number of bitcoins being circulated at any one time.
Unlike with physical currencies, Bitcoins and other digital currencies will not be hampered by the limitations and red tape of currencies, exchanges, and regulations. As mentioned above, the creators of Bitcoin planned on bitcoins becoming a part of our future, as bitcoins are to continue flowing into the world until 2140.
As a result, it’s likely that more and more companies and organizations will start taking Bitcoins and other digital currencies as payment and using them as payment, thus increasing the presence and influence of digital currencies in our physical world as we continue into the 21st century.