What is Bitcoin?

Gemma says…

Bitcoin is the first decentralized digital currency. Users of this electronic cash can securely send online payments directly to each other without need for a “trusted” third-party (such as a bank) to process the transaction, reducing transaction fees and eliminating fraud.

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Origin of Bitcoin

In 2008, a person (or a group of people) under the pseudonym Satoshi Nakamoto published a white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System. This paper outlined a digital payment system where users could send and receive peer-to-peer transactions without needing a third party, like a bank, to verify transactions. This digital payment system is known as Bitcoin. Bitcoin relies on a network of worldwide miners to provide the computing power that the Bitcoin network actually runs on.

Satoshi Nakamoto had two philosophical goals

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The decentralized network of miners would reduce collection of power in the hands of a few and make the system secure and democratic.

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By creating an incentive to behave in the best interest of the network, miners are unlikely to behave maliciously and misrepresent transactions.

In the traditional financial system, banks act as intermediaries and are necessary to verify the validity of transactions. Middlemen always take a fee for providing this service.

By removing the need for a system centralized around banks, peer-to-peer transactions become cheaper, more efficient, and more accessible.

How do you buy Bitcoin?

Bitcoin can be purchased online through different exchanges, like Coinbase. Similar to foreign currencies, Bitcoin can be purchased in exchange for dollars or other government currencies at a specified exchange rate, determined as a function of supply and demand. After its purchase, Bitcoin can be used as a medium of exchange — to purchase other goods or services — or held as an investment.

Where do you keep Bitcoin?

After purchasing Bitcoin (BTC), it can be kept in either a wallet (digital or hardware) or on the exchange it was purchased on. There are different security implications for each.

 

Why is Bitcoin important?

One of the most compelling use cases for Bitcoin lies in remittance payments. A remittance payment occurs when someone living outside of their home country sends money back home to friends or family. Sending remittance payments today can be extremely expensive. In a 2014 Ted Talk, economist Dilip Ratha estimates that the average global cost to send money is about 8%. This number becomes higher when sending money to certain parts of the globe – Africa, for example, has an average cost of 12%. By using the Bitcoin network for remittance payments, individuals can cut costs associated with remittance payments, making Bitcoin an attractive alternative to banks and other traditional paths to money transfer.

The creation of Bitcoin has triggered the rise of many other cryptocurrencies as well. There are now more than 2,000 digital currencies, and this number is only growing. Cryptocurrencies have also led to the development of new fundraising models. Through the issuance of ICOs (initial coin offerings), startups and even larger companies like Kodak can issue tokens to raise capital, challenging traditional fundraising models such as venture capital.