What is it, how is it made and is it a bubble? 17,000 Friday and bitcoin futures set to start trading bitcoin code explained Sunday. Here’s a look at what bitcoin is and why there’s so much excitement around it.
It’s a fairly new type of currency, not controlled by any government or centrally processed by any bank or company. You can use it to buy things, though don’t expect your corner store to necessarily take it, and increasingly it’s used as an investment. You could think of it as a sort of gold for the digital era. Like gold, no one centrally controls production, supply is limited in part by the effort required to produce it, and you can hold on to it as a store of value.
But because it’s digital it can be sent anywhere easily, and each bitcoin can be divided up into fractions much easier than trying to cut up a gold bar, making it potentially much easier to use for actual transactions and to act like a currency. The biggest challenge to a digital currency is what’s called double-spending. Without a bank or credit card or other intermediary acting as a trusted third party, confirming that the same number of dollars come out of one person’s account and go into another, it’s hard to make sure people aren’t spending the same digital money in multiple places or multiple times. Bitcoin solves this with a public digital ledger that records every transaction, and which forms the basis of the blockchain. Specialized computers around the world crunch complex mathematical problems that incorporate information from a transaction, then once solved, other computers verify the math. The solved equation, with the transaction incorporated, is then added to the blockchain as a permanent record.
The combination of collective confirmation, and the public record of the transaction, combine to solve the lack of centralized clearing. New bitcoin is produced as the reward for trying to solve the complex equations involved in every transaction. Specialized computer farms are set up to solve the equations, with the first network to actually solve the equation rewarded with new bitcoin. The energy being used to power the network is enormous. Bitcoin-focused website Digiconomist calculates that bitcoin uses more than 32 terawatt hours of power a year, or about the same power as Denmark uses in a year. Digiconomist says that with much of the network powered by cheap coal electricity in China, each transaction has a footprint of about 122 kilograms of carbon.
How and why would you use it? Bitcoin is touted as a way to make free and secure money transfers, potentially cutting out the fees charged by companies who have traditionally processed those transactions. The digital currency could allow people in countries with heavily manipulated or controlled currencies to make international transactions easier, or it could be used as a more novel way to send money to friends. As to actually using bitcoin, while no one centrally controls it, you still need the software or app and an exchange to make the transaction easier.