Bitcoin Explained

Bitcoin is the first decentralized digital currency and payment network. It is an alternative currency which is used to send coins via the internet. Bitcoin is a cryptocurrency, meaning it uses cryptography to secure transactions.

The Bitcoin protocol is an open source cryptographic protocol which operates on a peer-to-peer network and is therefore powered by its users with no central authority or middlemen such as a government or a bank.

The “crypto-currency” concept was first described in 1998 by Wei Dai on the cypherpunks mailing list. In 2009, Satoshi Nakamoto, a pseudonymous person or group of people designed the original Bitcoin software and launched the network and the first units of the Bitcoin currency.

The Bitcoin network has a public ledger called the “block chain”. This transaction database contains every Bitcoin transaction ever processed, enabling a user’s computer to verify the validity of each transaction by checking its digital signature.

Bitcoin payments are easier to process than debit or credit card purchases, and you don’t need a merchant account in order to accept Bitcoin.

Payments are made from a wallet application on your computer or smartphone, by entering only the recipient’s address and the payment amount. Some wallets support obtaining the address by scanning a QR code or by touching two phones with NFC technology together.

In order to securely buy, use, and accept Bitcoins payments you can use an online wallet such as Coinbase who handles backups and stores approximately 90% of customer funds offline in bank vaults to prevent theft or loss. Coinbase also supports sending money through Android devices and SMS. Coinbase is also a Bitcoin exchange for buying and selling the digital currency.

The Bitcoins are created by a process called “Bitcoin Mining”. Bitcoin miners help with processing transactions and securing the network using specialized hardware and receive new Bitcoins in exchange.

Bitcoin has several advantages over other currencies:

  • Payment freedom – Sending and receiving money isn’t controlled by a central authority and therefore isn’t subject to bank holidays or any imposed limits.
  • Limited supply of Bitcoins – The Bitcoin protocol is designed such that only 21 million Bitcoins will ever be created. The design of Bitcoin mimics the supply of gold, which is a way to protect its value from profligate governments or central banks. The Bitcoin protocol is designed such that the supply of Bitcoins will increase over time until it reaches a total supply of 21 million.
  • Low transaction costs – Bitcoin payments are processed with either no fees or extremely small fees which are donated by users in order to receive priority processing.
  • Less risks for merchants – Since Bitcoin is a cryptocurrency, Bitcoin transactions are secure, irreversible, and do not include customers’ personal information. This protects merchants from losses caused by fraud and chargebacks aren’t possible.
  • Security – Bitcoin payments are made without including personal information. Bitcoin users can also protect their money by backing up and encrypting their wallets.

The Bitcoin market share is increasingly growing. In 2012, The Economist claimed that Bitcoin is becoming popular because of “its role in dodgy online markets”. In 2013, the FBI shut down the Silk Road, which specialized in selling illegal drugs online, whereupon the FBI took control of approximately 1.5% of all Bitcoins in circulation. However, since the transaction fees for merchants are lower than the 2%-3% charged by credit card processors, merchants of legal services are increasingly joining the Bitcoin revolution.


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