5/25/2017 WhatisBitcoin?

|WorldEconomicForum

What is Bitcoin?

Image: REUTERS/Benoit Tessier

24 May 2017

Alex Gray
Formative Content

In 2010, financial history was made when someone bought a pizza. If you havent heard about
this groundbreaking event, dont worry, you're not the only one.

The pizza wasnt the important part of the transaction - it was what was used to pay for it. The
meal cost 10,000 bitcoins and was the first time the virtual currency was used to buy
something in the real world. The day is now celebrated every year by bitcoin enthusiasts as
Bitcoin Pizza Day.

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Image: REUTERS

Things have come a long way since then. Bitcoins use and value have soared. If that diner
had held onto those 10,000 bitcoins they may not have made history, but they would be
around $20 million better off today.

In March this year, the price of one bitcoin climbed above the price of one ounce of gold for
the first time.

Bitcoins increasing value is due to the fact that its popularity has rocketed in recent years. In
2009, there were fewer than 10,000 transactions in bitcoin. By January this year that number
had trebled. Analysts put this down to the fact that investors think it will hold its value better
than some other investments, as well as the fact that it has become increasingly popular in
Asia.

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Image: Blockain.info

What is it?

But lets take a step back. What is bitcoin?

Its a cryptocurrency, which means it exists only in the digital world.

It was developed in 2009 by someone we still dont know who for sure using the name
Satoshi Nakamoto and is based on a payment system that allows one person to pay another,
without the need for any middle parties, such as banks.

There is only a limited number of bitcoins in circulation and new bitcoins are created at a
predictable and decreasing rate.

How does it work?

A person holds their bitcoins in a bitcoin wallet - in a mobile app or computer - and can send
and receive bitcoins through it.

They get the bitcoins in the first place by accepting them for a good or service, or from an
exchange, where they swap real money for bitcoins at the prevailing exchange rate.

Every bitcoin user has their own address - a bit like a bank account number - and controls all
the bitcoins coming in and out of that address.

The bitcoin transactions run on a system called blockchain. This is a public ledger, which
holds a record of every single transaction.

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Image: bitcoin.org

The other person receives the bitcoins once the transaction is verified. This verification
involves solving a complicated mathematical problem, a process called mining, and anyone
with a powerful enough computer system can do it.

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Image: REUTERS

What do I do with my bitcoins?

You can spend them, either on the internet at places such as WordPress and Reddit, or at
establishments that accept the currency.

Image: http://usebitcoins.info

When you want to turn your bitcoins into real money, you trade them on an exchange.

Whilst youre unlikely to be able to use them at your local grocer yet, some say it is only a
matter of time. There is now a Bitcoin Visa Debit card which makes spending them easier.

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You dont have to understand the process of bitcoin in order to start using it, after all, few
understand the inner workings of a bank.

Image: Reuters

The problems
But not everything is rosy in the bitcoin world.

There is a limit to how many transactions can be processed in a given time-frame, and the
increase in transactions has meant a slowing down of payments.

For years, those involved in bitcoins software development have argued over how to
overcome its capacity problems. That problem is still not solved.

But there are more mundane problems, like the fact that it suffers from price fluctuations.

And, like any software based system, its also vulnerable to attack.

Then there is the matter of how different countries treat the currency. Some treat is as a
commodity, like oil or gold, but others treat it like money. Some prohibit its use entirely.

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Image: http://www.coindesk.com/bitcoin-legal-map/

Governments dont like the fact that bitcoin users are anonymous, and they have concerns
over its use for criminal activity and money laundering.

Their worries arent unfounded. In the recent ransomware attack, WannaCry hackers
demanded bitcoins as payment, and so far $80,000 has been paid out.

The EU wants to be able to identify bitcoin users in the name of preventing money laundering
and terrorist financing.

In addition, the whole system is not highly regulated. Partly, this is because any developer in
the world can verify exactly how bitcoin works. The bitcoin protocol itself cannot be modified
without the cooperation of nearly all its users, who choose what software they use.

Even where regulation exists it is not always clear.

Some say that the uncertainty over regulations will get in the way of bitcoin growing.

Is it here to stay?
Bitcoin is not the only cryptocurrency, lots of others have entered the market - over 200 of
them. Whilst bitcoin is still the leader, Ethereum, Ripple and NEM and many others also exist.

The Economist thinks that were in a cryptocurrency bubble from where the only way is down.

Even some of those who work intimately with bitcoin say it is going to be a failure.

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But according to a website that tracks bitcoin obituaries, the currency has already died - ie
been predicted to fail - 106 times. And a newly published study says that bitcoin and other
cryptocurrencies are no passing fad.

In short - no one really knows just yet.

Pizza anyone?

Written by

Alex Gray, Formative Content

The views expressed in this article are those of the author alone and not the World Economic Forum.

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