Bitcoin - What is it and How Does it work?

What is Bitcoin?

Bitcoin is a type of currency that is used all around the world. It is a digital currency that is stored electronically like the data on your computer. Bitcoin is different to the money that you are used to using because there are no notes or coins. It is all digital.

This form of digital currency is not controlled by anyone and transactions are handled by the community network that supports it. This means that it is a decentralised currency and the system that manages it is a peer-to-peer community network.

Bitcoin was created by Satoshi Nakamoto, a software developer's pseudonym, in 2008 and it was released as open-source software a year later. Satoshi Nakamoto claimed to be a 37 year old Japanese man, however some people have speculated that he may not be Japanese due to the perfect English that he used and also for not having documented the software in Japanese. For more details about Satoshi Nakamoto, click here.

How does Bitcoin Work?

When a bitcoin transaction takes place, it is verified by a network of nodes and then recorded in a distributed ledger in a process called "mining". The public ledger is called the block-chain and this can be seen by anyone. This makes the whole process transparent, but all the transactions on the public ledger are anonymous in that they are not linked to the identities of people. Anyone can see how many bitcoins each account has, but they cannot see who owns each account. You do need to be careful though, because once you have sent your bitcoins in a transaction, there is no way of getting them back unless the person you sent them to returns them to you.

Bitcoin Security

What determines that you are the rightful owner of a particular account (or "wallet") is a digital private key. If someone else gets hold of the key by hacking into your computer or any other means, then they will gain access to all your bitcoins and there is no way of retrieving the stolen bitcoins once they are gone. It is therefore vitally important to keep your anti-virus and firewall software up-to-date and working correctly to ensure that no-one has access to your computer. There are also other measures you can take to increase your security.

Criminal Activity

Bitcoin is being used more and more by merchants every day. Unfortunately it is also being used more and more by criminals because of the anonymity involved. There are many scams going around including malware that infects your computer and then encrypts your data files and holds them hostage until you pay the ransom using bitcoin. This is also referred to as "ransomware". It is therefore very important to make regular backups and keep some of these backups off-site. You never know when one of your employees will accidentally open the wrong email attachment and activate one of these ransomware programs.

More Information

So Bitcoin is a digital currency in the form of open-source software that is managed by a peer-to-peer community network. It is an alternative option to the normal currency that is commonly used. While there are good applications for using this type of currency, you also need to beware of the risks and downsides.