‘The money of the future’, ‘the currency in fashion’… In a constant fight to change e-commerce, this concept has many peculiarities and has been given just as many names. How can this currency achieve it? In this post, we will analize the “Bitcoin revolution” and why this ‘cryptocurrency’ is in the public eye.
What is it and how does it work?
Bitcoin is the first, most important and well-known decentralised virtual currency that allows value to be stored, money to be transferred and payments to be made in an exclusive way.
It is not owned by any central bank, savings bank or investment bank, as all other world currencies, such as the euro, dollar or pound, and is therefore decentralised. It is known more specifically as a ‘cryptocurrency’ as it is secured by powerful cryptography, allowing it to be marked with a unique digital fingerprint, making it unrepeatable and immutable.
In comparison with other alternatives, Bitcoin has many advantages:
- It is transferred online directly from person to person, without going through a bank or any other intermediary.
- This means that fees are much less.
- It can be used anywhere in the world.
- Accounts cannot be frozen.
- There are no arbitrary limits.
The days for money as we have known it until now are numbered. For experts like the financial services entrepreneur Meyer ‘Micky’ Malka, this is a reason to be optimistic. He is convinced that money, as we know it today –that is notes, coins and even credit cards– will be replaced by entirely electronic and virtual payment methods. He does not only believe this; he is one of the main drivers of this change and promises to transform, together with virtual banks, money into something virtual.
The dynamics are straightforward, here’s a simple example: A wants to pay B in Bitcoin. The community of users must validate the transaction, provided that A has enough money. All users then note that A has one less Bitcoin and B has one more.
The accounts are maintained by the community and the currency value depends on people trusting the system. It is completely anonymous; it is not someone’s identity that is validated but rather their password. The Bitcoin community knows how much money there is in A’s account but does not know who it belongs to. This communication is carried out between computers, not the users themselves.
For a user, sending a Bitcoin is as easy as sending an email, but for computers it is a more complex process as in this system, absolutely everything is secured by cryptography, algorithms and mathematical functions that prevent any attempt to modify the information.
Let’s go back to the transaction between A and B.
What does it contain?
- Firstly, it contains A’s digital signature so that everyone can verify that the transaction is being carried out by the owner of the account.
- It also contains the instruction to transfer a Bitcoin to B, notifying the transfer message so that everyone knows what to do.
- Finally, it contains the reference to one or more past transactions, showing that A has enough money to make the payment to B.
If all of these points are met, the message will turn into a possible transaction.
Why would it be a “possible” transaction?
This movement will not yet be able to be noted in the ledger due to a clear problem: disorder. As there is no central administrator, many transactions are being validated in many different places and in a different order. The challenge is for all of these to agree to establish an order and ensure that copies of the ledger are the same.
This is where the Blockchain concept comes in.
Blockchain is the technology behind Bitcoin. It is designed to allow us to experience a new revolution and to process all of the previously-mentioned capital movements, reaching the desired order. Everything moves through this blockchain.
In basic terms, it is a unique register which stores all the transactions that are made, somewhat like a ledger that records all capital movements. This database has allowed all the transactions made with Bitcoin since 2009 to be stored, the same year in which it was presented by founder Satoshi Nakamoto. Since then, it has reached an estimated total market value of 5.25 billion euros, so it is easy to guess why Bitcoin has become the most famous virtual currency in the world.
