The idea of Bitcoin was created by an anonymous programmer who goes by the name
“Satoshi Nakamoto.” The idea came to this person back in 2008, when the world economy was
looking at a major recession. Bitcoin is called virtual currency, but a better term is cryptocurrency. Unlike physical money, there are no coins or paper money officially produced. No government entity decides how much and when to release it into the world. Bitcoins are created digitally by people as they solve complex math problems with their computers. In many senses, it is truly decentralized.
Bitcoin is Virtual Currency
Another thing that sets Bitcoin without traditional currency is that it is virtual. It is not meant to say the currency and paper are produced to represent the value of money. Instead, bitcoins are available in virtual spaces. This means that you can not go to an ATM and withdraw physical money. Some people have created Bitcoin's unauthorized physical representation, but first and foremost, Bitcoin is virtual.
Bitcoin has Scarcity
Because only 21 million Bitcoins will be made, BTC has weaknesses, which can be printed against conventional currency when the government decides to print more. Spreading around the world to create Bitcoin, the number created by "mining" will be half of every four years. This means that people will still be able to make them until 2140.
HOW DOES BITCOIN WORK?
Let's start by looking at the different things you need to get a cryptocurrency working. We'll
start with the basics and then move into more specifics about what you'll need to get started.
● The Transaction - The first thing you need to think about with a virtual currency is the
transaction - the actual exchange of value from one person to another. While this may
sound simple, in many ways it can be easy to forge a transaction to try to cheat the
system. With physical currency, transactions are controlled by banking institutions
which verify that they're not forged and are unique.
● A Serial Number - To avoid people trying to forge transactions or reuse them with
virtual currency, you need a way to tie a unique serial number to each person and
each transaction as well. Bitcoin does this by using a private and public encrypted key.
These hashes are used to make sure transactions aren't duplicated in the network and
there's no way to cheat the system.
● Goodbye Banks - Currently, banks are in place to facilitate a financial transaction
between two people. When Bitcoin was being set-up, it was realized that banks could
be taken out of the picture entirely if a peer-to-peer network was created to verify the
transactions between two entities. This decentralization of financial transactions is one
of the biggest reasons so many smart people are getting excited about Bitcoin.
● Bitcoin Mining - Bitcoin is produced through a competitive and decentralized process called "Mining". Another piece is needed to make Bitcoin work. If it's too easy for
transactions to be validated, people could program bots to flood the network with
verifications, making it difficult to actually verify the transaction. To combat this, the
idea is to make it computationally difficult to verify the transaction. This helps fight
against the bad guys while at the same time offering a way to reward people who give
up computing power to verify the transaction. The computational puzzle has to be
difficult enough to make it impossible to hack while easy enough to still allow people to
solve in a reasonable amount of time.
