Last Updated: 2023-08-30 05:58:43
Bitcoin is just but an example of the thousands of digital currencies to be invented since the Global Financial Crisis of 2008. However, Bitcoin is the most talked about virtual currency and has witnessed the most progress since its conception in 2008. The initial mention of Bitcoin was in a published blog article in 2008 by the anonymous author Satoshi Nakamoto. Despite the actual author using a pseudonym for his piece, this pseudonym has been accredited to having invented Bitcoin. According to Satoshi Nakamoto’s paper, the modern world needed to embrace a pure version of electronic cash that would allow online payments from one party to another without financial institutions as the middlemen (Hayes, 2021; The Guardian , 2014).
Bitcoin shares this view with all other digital currencies like Ethereum, Dogecoin and Litecoin. The invention of Bitcoin also envisioned an end to the financial gain banks make by the charging of transaction fees which still counts as losses to those who surrender their trust to them as a custodian of their money. Conversely, it is the trust given to financial institutions and governments to regulate currencies that give value and security to the conventional currencies e.g., £, €, ¥, $ etc. The deductions from the sender and additions on the receiver in each transaction evidence that the transaction was completed and the institutions are trustworthy (The Guardian , 2014; Al Jazeera, 2021).
Bitcoin’s public ledger model known as blockchain, also offers a similar guarantee of security but without fee charges. The blockchain ledger model is a compilation of verified transactions that have accumulated and synced together over time and continually expands as more transactions take place. The blockchain model lays bare to every user in the system that a certain user actually owns the very bitcoins they wish to spend. These verification files serve as transaction records by every user and deter, to an extent, any cases of attempted double-spending and fraud (Al Jazeera, 2021; The Guardian , 2014; Frankenfield, 2020).
How does a bitcoin transaction work? In practice, bitcoin is an open-source software and uses encryption keys to secure the system. Each user account has two keys; a private and public one. The sender uses their public key to send bitcoins to the receiver through the latter’s public key. The sender then uses their private key to encrypt the transaction which will then be decrypted on the other end by the receiver. Hence, the private encryption keys act as a virtual PIN address which restricts third parties from interfering with the transaction. One can no longer use or access their bitcoins once they forget their encryption keys which is not the case with conventional currencies where a central authority can retrieve or change your PIN address (Al Jazeera, 2021; The Guardian , 2014).
Bitcoin gained momentum when PayPal allowed bitcoin users to buy, hold, and sell bitcoins. In early February 2021, Tesla Inc. declared that it had invested billions of dollars in the Bitcoin system which would allow bitcoin users to purchase Tesla cars and other services using bitcoins in the future. Mastercard was another electronic cash service provider that accepted the use of bitcoins in the buying and selling of goods and services. In spite of this progress, only a few million bitcoins are in circulation which translates to a very low percent of its users compared to other currencies. This characteristic is what makes digital currencies volatile. For Bitcoin to not just remain a technical utopic idea, it must have a substantial number of people using it for it to be a viable currency (Al Jazeera, 2021; The Guardian , 2014)