‘Bitcoin’ is a form of digital currency, created, held and spent electronically, and the first example of a growing category of money known as ‘Cryptocurrency’. Bitcoins are not printed like physical currencies such as USD or PKR but they are in fact produced by people & businesses, running computers all around the world and using software that solves mathematical problem.
The purpose of devising this innovative virtual payment system was to produce a currency, independent of any central authority, transferable electronically, more or less instantly, with very low transaction fee. For better understanding of the bitcoin concept, a few salient features of bitcoins are listed below:
- The system is peer-to-peer and transactions take place between users directly, without an intermediary hence, it’s a decentralized system with no single entity or bank controlling it.
- The public ledger that records bitcoin transactions is called ‘Blockchain’. It is a distributed database maintained by a network of communicating nodes running bitcoin software.
- Bitcoins are created digitally, by a community of people that anyone can join. They are either created as reward for payment processing work in which users offer their computing power to verify and record payments into the blockchain. This activity is called ‘mining’ and miners are rewarded with transaction fees and newly created bitcoins. Besides being obtained by mining, bitcoins can also be exchanged for other currencies, products, and services. However, unlike government-issued money which can be printed at will, the supply of bitcoin is mathematically limited to 21 million bitcoins which can never be exceeded.
- When sending bitcoins, users can also pay an optional transaction fee to the miners but miners can choose which transactions to process and prioritize those that pay higher fees.
- Smaller amounts of bitcoin are also used as alternative units are millibitcoin (mBTC), microbitcoin (µBTC), and satoshi (the smallest amount within bitcoin representing one hundred millionth of a bitcoin).
- A bitcoin account/ address/ wallet can be obtained by any individual or company without any account opening documentation for free. A person can own multiple accounts and remain anonymous without being linked to your personal data.
- To execute a transaction in bitcoin:
- A user has to have a bitcoin address (a virtual account/ wallet in form of a randomly generated sequence of letters & numbers) and a private key (also another combination of letters & numbers) to operate the account.
- The bitcoin address alongwith its bitcoin balance and all transactions are publicly visible but the private key is kept secret only known to the owner of the account.
- The sender uses his private key to sign a message with the input (his address or wallet), amount and output (receiver’s address or wallet) and sends it to the wider bitcoin network.
- From there, bitcoin miners verify the transaction, putting it into a transaction block and eventually solving it. The transaction is completed as verification is completed which should usually take a few minutes.
- Bitcoins can be bought and sold both on- and offline. Participants in online exchanges offer bitcoin buy and sell bids. The price of bitcoins has gone through various cycles of appreciation and depreciation since its introduction in 2008 based on its demand & supply. The value of a bitcoin at the end of CY2016 is around USD 970 and its maximum touched a threshold of USD 1,216 in November 2013.
- The number of merchants accepting bitcoins as mode of payment have increased over the years and has already crossed 100,000 merchants worldwide last year.
The challenges faced by the bitcoin system include reported cases of bitcoin theft, malware stealing, unauthorized mining and use of the system for illicit purposes such as money laundering, black market transactions etc.