When Bitcoin started out you needed thousands of of them just to buy a pizza.
Now those amounts could buy you a house.
If you don’t quite understand it, but wish you bought a load of them a few years ago, you’re not alone.
But what is Bitcoin? Here we look at the 21st Century currency that exists only in cyberspace, thanks to our colleagues at Mirror Online.
The online currency has risen dramatically in value
What is Bitcoin?
Bitcoin was the first of what have become known as “cryptocurencies”.
These are forms of digital money that use encryption to secure transactions and control the creation of new units.
The popularity of Bitcoin has spawned many copycats – sometimes called “altcoins”.
To make things more confusing, there are also “second generation” virtual currencies like Ethereum, which has been in the news recently following the hack of the Distributed Autonomous Organisation (DAO) investment platform.
Where did Bitcoin come from?
Created by a mysterious developer who uses the pseudonym Satoshi Nakamoto, Bitcoins exploded on to the financial scene in 2013, following enormous increases in their value.
In the original Bitcoin white paper, Nakamoto describes his creation as a “peer-to-peer version of electronic cash”, allowing “online payments to be sent directly from one party to another without going through a financial institution”.
How does Bitcoin work?
Nakamoto wrote that such a currency uses “cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party”.
This sort of stateless, bank-free currency uses a distributed, cryptographically secure “blockchain” to record payment transactions.
Recording of payments onto the blockchain is powered by users, who offer their computer power.
They are rewarded with newly created Bitcoins, and this activity is referred to as mining.
How to get Bitcoin
Bitcoins can be obtained in a number of different ways. It’s possible to accept them as payment for goods or services.
You can also buy them directly from individuals or special websites called ‘exchanges’ that will swap Bitcoins for regular currency.
A Bitcoin machine (Image: Jon kent)
Bitcoin wallets are simply specially-designed programs that store your Bitcoin, the same way a regular wallet would store your cash.
They can be used either on a desktop computer or a smartphone and can be stored securely on the web so they can be accessed from anywhere.
How to mine
Mining is a tricky process that involves solving a complex maths problem that takes both time and computing power. The more powerful your computer (and thus, the quicker you can crunch the numbers) means a more difficult problem.
Custom-built Bitcoin mining hardware and software is now available, allowing miners to find Bitcoins even faster.
Each miner also solves a dual function as they process and secure transactions on the block chain. But the more miners that join, the harder it becomes to find Bitcoins.
What is a Bitcoin miner?
A Bitcoin miner can be anyone that simply does it for fun right up to someone with the latest equipment who is attempting to mine for profit.
Bitcoin miners also join into pools that split the workload and gives each of them a share of the profits.
The future of cryptocurrencies
Second-generation cryptocurrencies include altcoins with more advanced functions, that harness the computing power of the blockchain.
An example is Ethereum – the blockchain can execute “smart contracts”.
These are pieces of computer code that can interact with other coded contracts and perform work – for instance moving money around and making decisions.
The DAO platform that was hacked is written into the Ethereum blockchain and can autonomously operate without humans to control the organisation.
To decide what investments the DAO makes, its members vote on which proposed contacts will be included in the blockchain.
This could be the start of an autonomous financial future dictated by machines rather than humans.
Source: Derby Telegraph