Some of you may have heard of Bitcoin. Some of it good, some of it bad and in most cases you might just be wondering what it is.
The mechanism behind Bitcoin is pretty complex but this is Bitcoin in a nutshell.
The idea of electronic currency is not a new one. The dream of a truly cashless and cardless society has been the stuff of science fiction for some time. Paying for things with the wave of a hand or press of a button is a pretty cool concept with easy, secure, fast and cheap payments being the goal chased by researchers.
The concept of an electronic currency was investigated by many notably David Chaum’s and Stefan Brand’s DigiCash back in 1990 as well as other forms of digital currency.
Bitcoin was first a paper published in November 2008 under the name Satoshi Nakamoto titled Bitcoin : A-peer-to-peer Electronic Cash System (click the link to see the original paper hosted on bitcoin.org).
The idea behind this paper was to define an electronic cash system that was independent of any financial institution, verified within its own system and audit-able with the purpose of preventing counterfeiting and other types of fraud.
Bitcoin is a pretty interesting step forward in technology as it allows you to perform transactions between two parties that can be verified by the Bitcoin network. Each transaction is unique and can be audited to verify its validity. This essentially made forging transactions impossible if properly used by the network.
The core function of Bitcoin was to mimic cash electronically with some added features. Cash is anonymous, designed to be resistant to counterfeiting but with the drawbacks in that it is easily stolen or lost and traditionally only works when both parties are physically in the same location.
Bitcoin is designed to be also anonymous and extremely hard (if not impossible) to copy/counterfeit but has the advantage that a digital wallet can be backed up making Bitcoins more resistant to loss and theft. As it is electronic it also allows users to make transfers both in person or via electronic means with verification of each transaction taking between seconds and minutes instead of the usual days when handled by traditional handlers like banks and credit card processors.
The core mechanism of Bitcoin is called the Blockchain which is a file detailing every transaction verified within the Bitcoin network. This file is available to everyone in the network and each transaction is verified by many active members giving all holders of Bitcoin a sense of security when sending or receiving Bitcoins.
The very first Bitcoin transaction was in February 2010 to buy two Pizzas for 10,000BTC. Back then that equated to less than AUD$50 but is now currently worth over AUD$4m!
At this point the only way to use Bitcoins was to find someone who would exchange Bitcoin for goods and services. Bitcoin was almost a novelty but very soon, it was going to become a sweetheart for speculators and make the Bitcoin story much more dramatic and interesting as entrepreneurs established the first Bitcoin exchanges allowing people to buy and sell large volumes of Bitcoin for real-world money.
My next posts on Bitcoin will be about the explosive growth, the spectacular falls, how Bitcoins are created, alternative coins, how the establishment reacts and what might be in store for Bitcoins and others like it.
Stay tuned, subscribe or follow to get updates. If you have any questions or comments about Bitcoin I welcome you to send them to me anyway that suits you. Your questions can be anonymous and I hope to include my answers at the end of this series.