Bitcoin (BTC) is an online commodity that is based on an open-source, peer-to-peer encryption protocol. It was first described in 2009, Satoshi Nakamoto, a developer. Creation and transfer of Bitcoin is done on an internet-based network and is not managed by any central authority.
The creation of new bitcoins is automated and may be accomplished by servers, known as bitcoin miners, that confirm bitcoin creation by adding codes to a decentralized log, which is updated and archived periodically. Each bitcoin is subdivided into 100 million smaller units called satoshis, defined by eight decimal places.
Bitcoins can be transferred by computer or smartphone, without any intermediate financial institution. Ownership of bitcoin balances can be authenticated with dedicated servers (the miners), which use a public-key encryption scheme. Each 10-minute portion or “block” of the transaction log also allows for a predetermined number of new bitcoins to be awarded to miners based on computational data added to the log and confirmed by other miners.
Creation of a new britcoin, is, therefore, a special case of a transaction, in which the new bitcoin is deemed issued in exchange for solving a coputationally intensive encryption problem. The number of newly created bitcoins per period depends on how long the network has been running. Currently, 25 new bitcoins are generated with every 10-minute block. This will be halved to 12.5 BTC during the year 2017 and halved continuously every 4 years after until a hard limit of 21 million bitcoins is reached during the year 2140.
Bitcoin is accepted in trade by various merchants and individuals in many parts of the world. Although bitcoin was initially promoted as a virtual currency, many commentators currently reject that claim due to bitcoin’s volatile market value, relatively inflexible supply, and minimal use in trade.
Is bitcoin the way forward?
Alex Ferrara, partner in Bessemer’s New York office, specialises on investments in the software and internet sectors and he says whether it will succeed as a mainstream currency or not misses a more important point.
Bitcoin is already a success, offering great potential beyond providing a new store of value or currency. Ferrara says that what is more exciting about this, is the growth of the underlying network of participants and the economic incentives promoting its growth. About 30 years after the birth of the internet, we may be beginning to see an imortant new technology layer emerge, that is designed specifically to enable secure online transactions.
The opponents of Bitcoin claim that the virtual currency allows for exchanges made in dark recesses of the internet, where anonymous buyers can buy all sorts of illicit items from anonymous sellers (see ExecutiveSurf Silk Road article.)
However, while it certainly true this was the case in its early days, recently the market has changed dramatically. Bitpay, a company that allows legitimate merchants to accept bitcoin as a form of payment, now serves more than 10,000 merchants (a tenfold increase in six months) and processes more in transaction volume than the Silk Road marketplace.
Three of the leading U.S. Bitcoin startups have registered with the financial crimes enforcement network agency of the federal government and strictly adhere to the same anti-money-laundering processes followed by major American banks. Also, several of these bitcoin companies have raised capital from leading venture capitalist firms, giving them credentials, but also allows them to invest in infrastructure, compliance and customer awareness.
Something quite fascinating about bitcoin, is that all historical transactions are publicly viewable via a public transaction ledger, called the blockchain. So, in theory, with the right tools, we could all see how consumers and merchants use bitcoin. To date, the bitcoin network has seen more than 15 million transactions, with more than 50,000 senders and receivers transacting each day.
In short, bitcoin is fast becoming a legitimate online currency.