If you look up “currency” in Merriam-Webster, you will find it defined as “the money that a country uses” and “the quality or state of being used or accepted by many people.”
Recent news stories involving a new form of currency, bitcoin, have sparked the interest of many individuals.
How Bitcoin Works
Bitcoin has emerged as a digital currency that exists virtually. It is a “cryptocurrency” which uses cryptography to manage the creation of units, administer use, and provide security. Bitcoins are “mined” by solving complex mathematical problems. Ownership of bitcoins is anonymous.
Bitcoin is different than the currency we use in three fundamental ways.
- Bitcoin operates without a central authority (e.g., a central bank). The currency is managed by a peer-to-peer technology that is responsible for all functions, including issuance, transaction processing, and verification.
- Unlike the national currencies, bitcoin exists primarily as a digital currency, though bitcoin can be made available in physical form, if desired.
- The number of bitcoins is limited to 21 million. New bitcoins are created at a rate of 25 every 10 minutes (a rate which is reduced by 50% every four years).
Bitcoins can be purchased on a bitcoin currency exchange and transferred to a digital bitcoin wallet. It should be noted that bitcoins have been subject to sharp and rapid changes in value, rendering their value highly unpredictable at any given time. Its commitment to a limited production is fundamental to its objective of retaining value, unlike other national currencies, which may be devalued by printing excess supply to meet economic and political ends.
Once you have a bitcoin balance, you may begin to purchase goods or services from providers who accept them. However, bitcoin has limited acceptance, though it has found some appeal to parties engaged in illegal activities because of its anonymity.
Whatever the eventual public acceptance is of a digital currency, bitcoin is proof that a currency can be anything as long as it is used and accepted by people to transact business.