Bitcoin is one kind of digital currency or cryptocurrency, a medium of exchange that exists exclusively online. The currency broke into mainstream consciousness in 2017, as its price ran up thousands of dollars over the course of the year. More recently, it skyrocketed in 2020 and 2021, as traders saw it as a way to get rich quickly, before plummeting massively in 2022.
Bitcoin has created much controversy, from proponents who say it’s the future of currency to those who decry it as a speculative bubble. Here’s what you need to know about Bitcoin, how it works and some of its drawbacks.
What is Bitcoin and how does it work?
Bitcoin debuted in 2009, when the software underpinning the currency was released. Its origins are a bit mysterious, however, and a person (or perhaps group) known as Satoshi Nakamoto claims the credit for unveiling the cryptocurrency.
Bitcoin operates on a decentralized computer network or distributed ledger using blockchain technology, which manages and tracks the currency. Think of the distributed ledger like a huge public record of transactions taking place in the currency. The networked computers verify the transactions, ensuring the integrity of the data and the ownership of bitcoins, and they’re rewarded with bitcoins for doing so.
This decentralized network is a huge part of the appeal of Bitcoin and other cryptocurrencies. Users can transfer money to each other, and the lack of a central bank to manage the currency makes the currency almost autonomous. This autonomy means that the currency, at least theoretically, can avoid the interference of governments and central banks.
Bitcoin can operate mostly anonymously. While transactions might be traceable to certain users, the person’s name is not immediately tied to the transaction, even if the transaction is processed publicly. However, authorities have become better at tracking the movements of bitcoins, because the ledger of bitcoin transactions is publicly available.
Where do bitcoins come from?
Bitcoins are created, or “mined,” when computers on the network verify and process transactions in the currency. Some computers called miners are specially outfitted with high-powered processors that can chew through transactions and earn a part of a bitcoin. So Bitcoin requires a lot of processing power to maintain the network and a lot of electricity to run those computers.
Bitcoins aren’t created infinitely, however, and the currency is limited to 21 million whole units. Experts expect the remaining number of bitcoins to be mined out around the year 2140. When this occurs, miners will be rewarded solely with a fee for processing transactions.
While the number of bitcoins may be limited, each whole bitcoin can be split into much smaller units. In practice, bitcoins are divided into fractions of a coin to facilitate payments of very small amounts of real currency. A bitcoin can be officially divided into as many as one hundred million parts, which are called satoshi in honor of the mysterious founder.