Everybody's talking about Bitcoin. Here's what you need to knowArchive
Like the Tulip Mania of the early 17th century and countless other speculative economic bubbles, Bitcoin underwent a major correction last week after reaching an astounding 19,850 US dollars earlier in December of last year. But what really is Bitcoin? And why is it the talk of the town?
What is Bitcoin?
It would be fair to say that most people are left bewildered by the very concept of digital currencies, primarily because it involves understanding a new tech-savvy paradigm. However, at its foundational level, cryptocurrencies — as they are dubbed — are not altogether very different from the idea of tangible money.
The original cryptocurrency has been a lot in the news lately but what is it and do digital currencies have a future?
A cryptocurrency is a virtual currency which is encrypted and anonymous, making it secure and hard to track. It has no physical manifestation and exists only as a unique string of numbers and characters in the memory of computers. These currencies are traded on online exchanges only geared towards cryptocurrencies.
Bitcoin was the first cryptocurrency which was started in 2009 by an anonymous group or person who go/goes by the name of Satoshi Nakomoto, who vanished from the online community in 2010.
What makes Bitcoin unique is that unlike conventional currencies, no central bank or government issues cryptocurrencies and it is not legal tender — you cannot use it to pay your taxes for example. Instead the value and volume of transactions all depend on the community that trades in them. Like physical currencies, however, digital currencies are backed by trust. Whereas paper currencies require their users to trust that national state banks will stand by the value invested in them, cryptocurrencies require a more dispersed form of trust — that their algorithm will prevent fraud and in the demand and supply from other users.
Bitcoin can also be used anonymously since unlike credit cards or a bank account, there is no associated address or ID registered with your Bitcoin account — and this is all part of the appeal of cryptocurrencies. However, Bitcoin isn’t as anonymous as its fans and suspicious authorities state — it can be possibly traced to you through your IP address, service provider or spending patterns for instance.
There are currently 16.78 million Bitcoins in circulation with a limited number of new Bitcoins added every day. And anyone with a high-powered computer and some know-how can obtain these. Bitcoins are ‘mined’ by powerful algorithm-crunching computers which ‘discover’ new bitcoins — essentially the solving of complex mathematical puzzles through computing power. These are, in turn, validated by the ‘blockchain’ — a virtual grid containing nodes representing users that act as the collective validation system. Think of every Bitcoin transaction as a bank account entry, but instead of the transaction being verified by the two transacting parties, it is recorded and verified by the whole community at once removing any chance of fraud.
Unfortunately, mining Bitcoins requires a lot of electric power. According to a report by PowerCompare, “[Mining Bitcoins] exceeded the energy consumption of 159 countries around the world.” According to Digiconomist, “it takes 29.05 TWh (terawatt hours, equal to one million megawatt hours) annually to operate the energy-hungry computers and networks that power bitcoin transactions.” Furthermore according to the Bitcoin Energy Consumption Index, 10 US households can be powered for a day by the energy consumed by a single Bitcoin transaction.