What is bitcoin?
Bitcoin is a cryptographically secured digital currency that operates outside of the mandate of a central authority. It was created in 2009 by the pseudonymous Satoshi Nakamoto, and originally conceived as a method of payment that wouldn’t be subject to government oversight, transaction fees or transfer delay – unlike traditional ‘fiat’ currency.
Back in 2010, bitcoins were worth around 0.003 cents each. As of October 2017, that figure is upwards of $4200 – though this value has proved volatile, with frequent intraday swings. In that time, hundreds more cryptocurrencies have emerged, all with unique features and applications. Few of these have any significant value, but bitcoin does have its rivals in the form of ether and bitcoin cash, and – to a lesser extent – litecoin, ripple and dash.
Commodity or currency?
Bitcoin was initially devised as a method of payment, and in certain cases functions as exactly that. But it both lacks widespread adoption and is currently far too volatile to provide a real alternative to fiat currency: vendors need to revise their prices constantly in response to its swings in value.
This means bitcoin is used first and foremost as an investment, resembling gold and other precious metals more than it does traditional currencies. Like commodities, it is beyond the direct influence of a single economy, and largely unaffected by changes in monetary policy.
Remember that while bitcoin isn’t affected by many of the factors that affect traditional currencies, there are a number of unique influences it has to contend with.
How does bitcoin work?
Bitcoin needs two underlying mechanisms to function: the blockchain and the mining process.
The blockchain is a shared digital ledger composed of all the bitcoin transactions that have taken place up to that point. These transactions are grouped together in ‘blocks’, which are cryptographically secured during mining and linked to one another.
The blockchain is accessible to everyone at any given time, and can only be altered with the will and computing power of the majority of the network. This means it is almost impossible to be retroactively amended, won’t fall victim to human error and lacks a single point of failure.
What is mining?
Mining is the process required to secure each of these blocks and, in doing so, releases new units of the cryptocurrency. These units are known as the ‘block reward’. In bitcoin’s case, the block reward is currently 12.5 bitcoins, though this halves every four years or so.
The miner’s role is to carry out this process by solving complex algorithms – an ongoing task which can be made easier or more difficult. By altering the complexity of the algorithms, miners can ensure they keep the processing time of blocks roughly constant. Because of their crucial role in the network, miners exert significant control over bitcoin, especially as mining has now become big business.
Once these tokens are in circulation, they can be freely exchanged via an exchange, and stored in a digital wallet. When you trade bitcoin with IG, you never actually own the underlying asset, so you won’t need a wallet or an exchange account.