20 February 2014 by Guy Halford-Thompson

What is Bitcoin

Digital money

Very simply, Bitcoin is the money of the internet or digital cash. Bitcoin is changing the financial system as dramatically as email changed the way we communicate.

From the early days of the internet there have been many attempts at digital money and all have failed until Bitcoin was created. When you hand cash over to someone it is very difficult to copy the bank note before you pay someone so one can resonably assume that the note is not a copy. The problem with digital money is that digital files can be copied very easily - what would stop you copying my digital bank notes the same way people copy music and files, undermining the whole system?

Historically the only way it could be done is by centralising everything and trusting those centralised parties. That is - the banks. Unfortunately throughout history the banks have shown to be untrustworthy, and although I live in a country where I trust my bank (up to a point) - many do not. Zimbabwe, Iran, Cyprus and many others have destroyed people's trust in the current money system.

Bitcoin solved the problem of digital money by using a distributed network to check the validity of transactions. This network ensures that only 1 copy of your balance can ever be spent and ensures no party in the system is able to modify their own balance unfairly. All transactions are announced to the whole Bitcoin network so anyone trying to cheat the system is caught out.

Why Bitcoin is Good

With Bitcoin you can be your own bank. Although Bitcoin banks are appearing there is no requirement to trust them and use them as you can hold your bitcoins yourself.

Transaction fees in the banking system are high. Banks make $70 billion / year from the poorest workers sending money to their families back home. Every purchase you make is inflated a few % due to credit card fees. Every wire transfer you make the banks charge a flat rate plus a % on top. With bitcoin you pay a small transaction fee of approx £0.01 to transfer anything from £1 to £100million anywhere in the world. Additionally the transaction happens in a matter of seconds and cannot be frozen or blocked.

When you spend on your credit card you can initiate a 'chargeback' - you claim someone stole your card and claim the money back from the shop you (or the thief) spent it at. Banks are merchants are loosing millions every single day from credit card fraud and other thefts. When you give a shop your credit card number they can take as much as they like from your bank whenever they like. This is a broken technology. Bitcoin is based on encryption technology making them impossible to hack. Used correctly bitcoin is as secure as cash.

Where can I Spend Bitcoin?

Bitcoin is money. You can spend it on whatever you like.

You can purchase everything from home goods on overstock.com to space flights with virgin galactic. Thousands of online businesses are starting to use Bitcoin and more and more shops, pubs and cafes are looking to accept them.

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