Over recent years, the popularity of using digital cash or virtual currencies has increased in popularity, with Bitcoin being the most popular. We’ve put together a fact sheet to help explain exactly what a Bitcoin is.
Bitcoin is not regulated or issued by the bank, but is generated through a computer programme. It is a digital currency that can be converted into currency after being deposited into virtual wallets.
Bitcoin was designed and developed in 2008 by a programmer known as Satoshi Nakamoto. He released the software used to exchange Bitcoins in 2009 and an open source community coordinated by developers now maintains it.
A computer algorithm controls the supply of Bitcoins, and it exists through an open-source software programme. When you download and run the Bitcoin client software, it connects over the Internet to the decentralised network of all Bitcoin users. It then generates a unique pair of mathematically linked keys. One key is private and kept hidden on your computer and the other is public, this is how the exchange of Bitcoins is completed.
Bitcoins are generated through solving algorithms and sharing the solutions on the entire network. It is very complicated, and requires powerful computers.
Transferring Bitcoins is relatively straightforward. Your Bitcoin software performs a mathematical operation that allows the combination of your private key with the other party’s public key and the amount of Bitcoins you are transferring. Bitcoin software clients not involved in the transfer then verify the transaction after it is distributed across the Bitcoin network.
Trading Bitcoins for other types of currency can take place in exchanges like Mt.Gox. The recipients address and payment amount are entered from the wallet application on either your computer or smartphone as payment to a merchant who accepts Bitcoins.
The Bitcoin network is controlled by all Bitcoin users around the world, and the value of Bitcoins in circulation in August 2013 exceeded $1.5 billion with millions of dollars worth of Bitcoins exchanged daily.