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What is bitcoin?
A digital currency and a worldwide payment system. Bitcoin is not connected to a bank or a state, instead it is a decentralized currency. It is a so called peer-to-peer payment system based on blockchain technology. The network verifies each transaction with the help of mathematical equations and computers.
Bitcoin is used to safely transfer value over the internet, with no third party needed. Every bitcoin transaction is documented and verified on a public record, making it both transparent and safe.
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How it started
In 2008 a document was published online. It was a so called technical white paper. This held an explanation of the concept of cryptocurrencies and how Bitcoin works. The paper had the title Bitcoin: A Peer-to-Peer Electronic Cash System and was signed with the name Satoshi Nakamoto. Bitcoin was launched a year later with open source code. This opened up for other coins and new technology to develop. The founder Satoshi worked together with several other developers between 2008-2010 until he/she handed over to Gavin Andresen. A big community has formed where developers share code with and help each other to test and develop Bitcoin. The open source code, the engagement from the developers and their maintenance of the software makes sure that Bitcoin works and is safe.
A short technological explanation
The blockchain is built around a network of nodes, which means a computer running software. These computers communicate with each other with help of the Bitcoin software.
When a bitcoin transaction takes place, data is sent across the network. Nodes in the network then verify the transaction. This process makes sure that the sender actually owns the amount they are trying to send, and that the amount has not been sent to someone else before.
When the information is confirmed, the transaction gets included in a so called block, together with many other transactions. When the transaction has been placed in the block, the evidence of the transaction is in the blockchain network forever. The blocks are arranged linearly, with new transactions added to the end of the chain. Each block holds a partial record of the previous block. Because of the blockchain structure, over time it becomes more and more difficult to change or remove blocks.
The miners and their computers compete to order these peer-to-peer transactions, which gives them a bitcoin reward. It is through this mining that new bitcoins are made.
The blockchain technology has opened up for many new projects. Ethereum is an example of a promising implementation of the blockchain technology.
Where are my Bitcoins stored if I do not have a bank to keep them for me?
You need a wallet to store your cryptocurrency. The wallet keeps track of all of the transactions to and from the wallet address and generates new addresses. Your money is never really in a physical wallet. The wallet is only mirroring the data already stored in the blockchain. Every wallet has a public key that is combined with the secret, private key, to send cryptocurrency to anyone. All cryptocurrencies have wallets designed for a specific coin, but several companies have created wallets that can handle a number of currencies. Read more about the wallet here.
The market decides bitcoin’s value
The bitcoin value is controlled by the market: supply and demand. Generally, bitcoin has high volatility, which means that the rate can vary a lot. Learn more about the Bitcoin rate here.
There is a maximum amount of Bitcoin that can be in circulation in the world, a total of 21 million. This was decided by the founders that wrote the code when Bitcoin was created. The limited access creates a high demand for bitcoin. Since no more bitcoin can be created after the limit is reached, inflation is in theory impossible. This is something normal currencies have problems with. Bitcoin is often compared with gold, where the value continues to grow with time. It is possible to split bitcoin into many small components. One dollar contains 100 cents, compared to one bitcoin that contains 100 million cents. The smallest bitcoin-cent is called Satoshi. it is named after the Bitcoin-founder.
What can bitcoin be used for?
Bitcoin is mostly used on the Internet to pay for products and services. More and more companies now accept Bitcoin as payment, for example cafés and online stores. Bitcoin has helped people all over the world who have the inability to hold a "regular" bank account to make payments, without having a third party involved. This means that people without an ID or a bank account can use bitcoin and other cryptocurrencies.
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