A futuristic virtual currency
How to define and use Bitcoin is controversial. Is it a type of currency, a store of value or a payment network?
By Maddalena Maltese
Are you planning to buy paint at Home Depot or purchase a loaf of organic bread at Whole Foods? Using cash or your regular credit card is not the only way to pay. These two retail chains, like many others, accept Bitcoin, Ethereum and Cardano for commercial transactions. These are not esoteric names, but cryptocurrency.
Unlike the dollar, euro or yen, which are centralized in banks and controlled by the government, Bitcoins and other digital cash are a ‘decentralized’ currency. There is no bank or central authority governing them, even though they are considered currencies.
They are not traditional money, but software. Do not be fooled by stock images of shiny coins emblazoned with modified B or E symbols; Bitcoin and those that followed it are a purely digital phenomenon, a set of protocols and processes. They are the most successful attempts to create virtual money using cryptography, the science of making and breaking codes.
The beginnings of Bitcoin
Bitcoin, which is the most popular cryptocurrency, was born a few months after collapse of the global financial company Lehman Brothers in September 2008, which kicked off a worldwide financial crisis and a total lack of trust in banking and financial systems.
In October 2008, an unknown creator (or a group of people) going by the name of Satoshi Nakamoto, who communicates only by email and social messaging, introduced the original rules of the Bitcoin network. In 2009 he/they released the software to the world, and in January 2010, the first online transaction took place between Nakamoto and Henry Finley, a North American financial promoter.
How cryptocurrencies work
Bitcoins are basically files on a computer run by that particular program developed by Nakamoto, and they are controlled by a network of users who verify the monetary transactions.
Even though Bitcoins seem very unlike the forms of currency you are used to, they still function just like the money used every day. You give your Bitcoins to someone and they, in turn, give you goods or services. Yet because Bitcoins are bank-free, there are no fees, or no conversion rate if you want to purchase a product in another country. There is no bank delay either, because in these transactions banking hours are irrelevant.
Where can you buy Bitcoin? There are several dedicated platforms to run cryptocurrencies. However, it helps to verify their legitimacy and transparency. People can send Bitcoins to each other using mobile apps or their computers, like sending cash digitally.
Bitcoins can be stored in a “digital wallet,” a virtual bank account with a secret key that allows users to send or receive bitcoins, pay for goods or save their money. While the digital wallet ID is public, names of buyers and sellers are never revealed even though each Bitcoin transaction is recorded in a public recorded ledger.
A technology called blockchain
As each Bitcoin transaction occurs, it is recorded as a “block” of data, and each block is connected to the ones before and after it. When a transaction is created, it is broadcasted to everyone in the Bitcoin network.
For that transaction to be added to the ledger, users called “miners” run mining software that solves cryptographic puzzles that then let them add the new block of transaction. The reward for adding a block is newly minted Bitcoins. There is generally a new winner about every 10 minutes that gets a chunk of new Bitcoins, until the limit of 21 million Bitcoins in the world is reached. At that point, in 2140, no new Bitcoins will be created.
A costly mining race for Bitcoin
So, the hundreds of thousands of computers involved in Bitcoin mining are in a computational race to process new transactions. It’s a race that requires a huge amount of electrical energy, with an environmental burden of an estimated 34 megatons of carbon emissions, according to Digiconomist’s Bitcoin Energy Consumption Index.
A lot of these companies are operating in Texas and Quebec, where the cost of electricity is low, but not all cities are prepared for the numerous blackouts connected with the “mining process,” or the predicted damage to the civil infrastructure, productivity and even medical facilities.
Currently, an estimated 39% of proof-of-work mining is performed using renewable energy. So, the most obvious path to a green future for Bitcoin is simply upping that figure.
Another concern is the high degree of anonymity guaranteed by the virtual currency’s transactions, which make it a preferred currency for criminal activities such as money laundering or virtual tax havens. These risks have been raised by the Federal Reserve, which is studying its own digital dollar that can offer greater guarantees, and more transparency and stability.
Despite these challenges and risks, El Salvador was the first country in the world to make Bitcoin legal tender on June 9, 2021, giving cryptocurrency an official place among national currencies.
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