Bitcoin is an encrypted digital currency that operates without the supervision of a central authority. It was created in 2009 by Satoshi Nakamoto and was originally conceived as a payment method that was not subject to government control, transaction costs or transfer delays, as is the case with traditional currencies.
In 2010, each unit of bitcoin was worth around 0.003 cents. As of October 2017, that figure has reached $4,200 – although this value is highly volatile, with daily fluctuations. During this time, hundreds of new cryptocurrencies have emerged, each with its features and applications. Only a few have a remarkable value, but some bitcoin rivals aim high like ether or bitcoin cash, and to a lesser extent litecoin, ripple and dash.
Raw material or currency?
Bitcoin was initially created as a payment method and in some cases that is its clear function. However, its adoption is not yet fully widespread and it is currently too volatile an asset to be a real alternative to traditional currencies: providers are forced to constantly review their prices due to the instability of their value.
This means that it is primarily used as an investment and is more like gold and other precious metals than fiat money. Like commodities, this asset moves away from the influence of a particular economy and is not greatly affected by changes in monetary policy.
Remember that although bitcoin is not influenced by many of the elements that affect traditional currencies, there are several specific factors that it does have to deal with.
How does bitcoin work?
Bitcoin needs two underlying mechanisms to work: the blockchain and the mining process.
The blockchain is a digital order book of all bitcoin transactions that have taken place up to this point. These transactions are grouped into “blocks, ” encrypted during mining and linked together.
The blockchain is available to everyone at any time and can only be changed if there is a consensus among the majority of the community. This means that it is almost impossible to edit it retroactively, that it is not susceptible to human error, and that it avoids the possibility of bugs.
Mining bitcoins is the process through which each of these blocks is encrypted and by doing this, new units of cryptocurrency are released, as a reward for the miners. In the specific case of bitcoin, the reward is equal to 12.5 bitcoins, although this is reduced approximately every four years.
The miner’s job is to develop this process by solving complex algorithms (a continuous task that varies in difficulty). By changing the complexity of the algorithms, they ensure that the processing time of the blocks is constant. Due to their crucial role within the network, miners exercise some control over the cryptocurrency, especially considering that mining has become a big business.
Once these units are in circulation, they can be traded through a market and stored in a wallet. By investing in bitcoin with IG, you never own the asset, so you don’t need a dedicated wallet or account.
What is a fork in bitcoin?
A fork occurs when the blockchain splits in two, generating two separate data records. It is the responsibility of the bitcoin mining community to agree on which of the two should continue to be used and which should be discarded.
Forks are the result of a mismatch of community mining programs and allow for essential updates to the blockchain software. The two main types of forks are the hard fork (or permanent divergence) and the soft fork (or soft divergence).
How is bitcoin used in business?
As a payment method
Some companies already accept bitcoin as a form of payment, although they are still in the minority. These are some of them:
- WordPress
- subway
- Microsoft
- Virgin Galactic
- Wikipedia
Indeed, these large firms have enough infrastructure to dedicate space to cryptocurrency. However, considering the regulatory concerns and high market volatility, it is hardly surprising that bitcoin integration is not yet widespread.
As a technological element
Many companies do not pay as much attention to its role as a currency and focus more on the decentralized system that underlies the foundation of bitcoin.
Blockchain technology has already been used to create various business models, in some cases related to international payments, web development and data protection. In addition, there are numerous funds determined to invest in projects based on this technology, which places cryptocurrency in the spotlight of financial centres around the world.
