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Introduced in 2009 by developer Satoshi Nakamoto, Bitcoin is a peer-to-peer payment network based on an open source protocol and a digital currency that is used in the network. The decentralized digital currency enables instant payments to anyone, anywhere in the world.
Bitcoin’s success has the potential to disrupt a lot of ideas about money. According to Stephen Mihm, “Anyone who thinks that Bitcoin will triumph has to believe that it will succeed where earlier generations of private currencies failed — that Bitcoin will, improbably, manage to overthrow more than century’s worth of accumulated state power, jealously guarded and ruthlessly enforced. That’s a preposterous fantasy — and a dangerous one, if you’re an investor. Indeed, people who believe that governments of the world will let a stateless cryptocurrency usurp their hard-won monetary prerogatives aren’t forecasting the future. They’re living in the past,” the University of Georgia professor wrote in an article on Bloomberg News.
The Bitcoin is called a cryptocurrency because it uses public-key cryptography. This means that when paying with bitcoin, there will be no exchange of digital notes or tokens between the buyer and the seller. Instead, the buyer requests an update to a public transaction log, called the blockchain. This master list of all transactions shows who owns what bitcoins currently and also in the past, and is maintained by a decentralized network that verifies and time stamps the payments. The Bitcoins are sent easily through the Internet, without needing to trust any third party. The Bitcoin was designed around the idea of using cryptography to control the creation and transfer of money, rather than relying on central authorities.
The Bitcoin is one of the first successful implementations of a distributed crypto-currency, described in part in 1998 by Wei Dai on the cypherpunks mailing list. The Bitcoin has been a subject of scrutiny due to ties with illicit activity. During 2013 the FBI shut down the Silk Road online black market and confiscated US$28.5 million worth of bitcoin. And The People’s Bank of China announced on 5 December 2013, that it was prohibiting Chinese financial institutions from using bitcoins.
Steve Horwitz, an economist at the St. Lawrence University who studies private monetary systems, reported to The Verge that “It’s something economists had never had to think about until this was developed, and we’re just beginning to think through all the implications of it.”
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The dollar is backed by the Treasury, or it has some intrinsic value, the same way gold can be made into jewelry. If a currency has no central authority and no intrinsic value, people can not trust that it will retain value over time.
It’s difficult to foresee what will happen to the Bitcoin because it is not like any currency ever created. Instead of a central authority, it is governed by a computer protocol. Instead of serving one country or a group of countries, it serves the whole world. And because its source code is public, anyone can launch their own version of Bitcoin at any time.
Image Credit: www.bloomberg.com
