17 July 2018
Bitcoin has hit the headlines numerous times over the last year. Sometimes for good reasons and sometimes for bad.
Publicity draws more interest and everyone from bankers and scientists to governments, geeks and online criminals are taking bitcoin seriously, even if very few of us know what is it, where it comes from, and how it works.
If that sounds like you, read our introduction to bitcoin and we’ll try and provide the answers.
Bitcoin is a cryptocurrency, otherwise known as a virtual currency. It’s not the only one, but it’s by far the best known. Unlike conventional currency, it is never printed and has no physical manifestation. It is created, held and used electronically.
As we all know, traditional currency is used to buy things electronically too. That happens every time you buy something from Amazon or Ebay and the cost is deducted from your bank account.
The key difference with cryptocurrencies like bitcoin is that they are not under the control of an institution like a bank or government.
Instead, a community of ‘miners’ creates bitcoin digitally. These miners are rewarded with bitcoins for using software to solve complex mathematical problems. The community also processes bitcoin transactions. Transactions are added to the blockchain, a massive decentralised ledger kept running by the miners who use computers to crunch the numbers and verify the payments made from one user to another.
It all sounds very complicated and it is. But the important thing to remember is that banks don’t control bitcoin, which makes it both unique and, to some people, highly desirable.
Because banks don’t control it, bitcoin can be used to make electronic payments of any value without fees. Transactions are also fast and comparatively safe, because you never have to type details into an online form in the way you do with credit cards
Another big attraction of bitcoin is anonymity. Thanks to the blockchain, the massive database of transactions, everyone knows how much there is in the virtual wallets that act as bitcoin depositaries but nobody knows who any single wallet belongs to. Handle your account correctly and nobody will ever know how much you are worth.
It is, because of the anonymity. It’s therefore much harder to trace criminals through their bitcoin wallets than it would be through credit card payments or bank transfers. Criminals regularly use virtual currencies to buy real goods, like drugs or weapons, on the virtual black market.
But bitcoin isn’t only used by criminals, and in fact the vast majority of bitcoin transactions do not occur on the dark web (a heavily encrypted part of the internet where anonymity is king). It’s true that, at the moment, it doesn’t have many ‘real world’ uses. Consumers have used bitcoin to buy tickets for shows, takeaways and drinks in pubs – to name just a few – but in reality not many retailers currently accept it. Nevertheless, companies like IBM are experimenting with new uses for the technology behind bitcoin.
Bitcoin is probably here to stay. You may not have any reason to use it now, but the growing popularity of cryptocurrencies means that you might in future. Whether it will ever become a mainstream currency is open to question.