Right now the entire web is all abuzz about Bitcoin – a digital currency you can use to buy things online, or trade for other currencies like dollars. But Bitcoin is a lot more than that, and is actually a very well thought out system.
Bitcoin was initially designed as a digital currency (“BTC”) to move outside any central bank, and to avoid the current rules of transactions. Bitcoin is entirely decentralized, and is not controlled by any government or reserve bank. Using cryptography and digital signatures, Bitcoin is “mined” by Bitcoin mining machines – these machines need to solve complex mathematical problems, which generate a 64 digit code.
These mining machines are standard PCs but typically customized with very high end graphics processors, and whatever hardware might be needed to work out that difficult maths problem. With each block of Bitcoins that are generated, the maths problem might alter in difficulty. There are thousands of machines working on these problems at any time, and because of increasing difficulty, the market cannot be flooded by a sudden onset of Bitcoins coming into circulation.
Every 10 minutes a block of Bitcoins are issued to miners, provided their machines can solve the complex mathematical problem. 25 bitcoins are generated every ten minutes, but every now and then the rate of new Bitcoins generate halves. For example, it will decrease to 12.5 bitcoins by 2017 – and then halved every 4 years.
Compare this to traditional government issued money – typically a reserve bank can simply print money as needed by the economy. Because of this fluctuating rate of printing money, traditional currency cannot easily be affected by inflation. Bitcoin also differs in that there will never be anything more than 21 million Bitcoins in circulation – and it becomes more difficult to generate over time. In other words, because Bitcoin is a finite resource, it matches characteristics of scarce resources.
Bitcoin uses exchanges to trade bitcoins between users, who use “wallets” to store their Bitcoins. Many of the current exchanges also allow you to purchase Bitcoins using your own currency – for example, right now you can buy 1 Bitcoin for between $95 and $125. But the price is now fluctuating because of all the current media attention.
If you want a brilliant explanation of how Bitcoin works, I recommend the video below: