The basics of Bitcoin: Here’s everything you need to know about how the virtual currency is made, and what keeps it secure
How do you feel about an entirely virtual currency that exists only in cyberspace and doesn’t even require a bank account?
Bitcoin was the first of what have become known as “cryptocurencies”. These are forms of digital money that use encryption to secure transactions and control the creation of new units.
The popularity of Bitcoin has spawned many copycats – sometimes called “altcoins”.
To make things more confusing, there are also “second generation” virtual currencies like Ethereum, which has been in the news recently following the hack of the Distributed Autonomous Organisation (DAO) investment platform.
Where did Bitcoin come from?
Created by a mysterious developer who uses the pseudonym Satoshi Nakamoto, Bitcoins exploded on to the financial scene in 2013, following enormous increases in their value.
In the original Bitcoin white paper, Nakamoto describes his creation as a “peer-to-peer version of electronic cash”, allowing “online payments to be sent directly from one party to another without going through a financial institution”.
How does Bitcoin work?
This sort of stateless, bank-free currency uses a distributed, cryptographically secure “blockchain” to record payment transactions.
They are rewarded with newly created Bitcoins, and this activity is referred to as mining.
The future of cryptocurrencies
Second-generation cryptocurrencies include altcoins with more advanced functions, that harness the computing power of the blockchain.
An example is Ethereum – the blockchain can execute “smart contracts”.
These are pieces of computer code that can interact with other coded contracts and perform work – for instance moving money around and making decisions.
The DAO platform that was hacked is written into the Ethereum blockchain and can autonomously operate without humans to control the organisation.
To decide what investments the DAO makes, its members vote on which proposed contacts will be included in the blockchain.
This could be the start of an autonomous financial future dictated by machines rather than humans.