So what exactly is Bitcoin and how does it work?
As the debate over whether or not Australian Dr Craig Wright is the inventor of Bitcoin continues, many are still coming to terms with what exactly a “digital currency” is and how it works.
To help, here are the key points at the centre of the Bitcoin system.
What exactly is it?
Bitcoin is a virtual currency that was created in 2009. It has the “virtual” or “digital” tag because it is almost entirely online-based.
Much like any other currency, Bitcoin is used online to buy goods and though some physical versions of coins exist it is the private codes written inside them that make them valuable, as this is what’s used online to make transactions. Few shops currently accept them.
Like other currencies, the value of Bitcoin changes as the amount people are willing to pay in exchange for it does. Right now, one Bitcoin is worth about £306.
How does it work?
Each Bitcoin sits in a user’s “digital wallet”, which is stored on a smartphone or computer, much like an online bank account. Users can then send whole or parts of Bitcoins to other people to carry out a transaction. Each transaction takes place directly between two people, with no intermediary.
So, in order to track movement, all Bitcoin transactions are recorded in a public list known as the blockchain. This prevents people spending Bitcoin they don’t have as well as tracing the entire history of every coin thanks to the unique digital signature each coin has.
So how do you get Bitcoins in the first place?
If you’re completely new to the format, one way in is to buy them using real money, but as already suggested it will cost you around £300 for a single coin. Another option is to sell items and accept Bitcoin as a form of payment.
The third way is a crucial feature at the heart of how the whole system works – you can create new Bitcoin by processing the transactions of others. This process is known as “mining” and essentially involves lending the processing power of your computer to help log other transactions taking place using Bitcoin.
By doing this work – which involves highly complex and difficult mathematical sums – users can be rewarded with new Bitcoins.
However the creation of new coins is moderated and controlled so that not too many are constantly being generated – it can take users years to earn even a single coin.
Are there benefits to using it?
Though still a fairly niche form of currency, knowledge and acceptance of Bitcoin continues to steadily grow. The complete logging of all transactions also means that copying or faking coins is very difficult.
It also means, though, that if a user loses or deletes their digital wallet their Bitcoins are lost forever.