Bitcoin is an open source, p2p form of digital currency. Bitcoin is a decentralized currency, with no government or central figure monitoring and guiding inflation or interest rates. Founded in 2008 by a software developer under the pseudonym Satoshi Nakamoto, Bitcoin represents the first example of cryptocurrency, a new digital asset class requiring cryptography-based verification measures. Bitcoin can be used by individuals to pay for goods and services in an electronic environment (i.e. online).
Bitcoin shares similarities with other major world currencies including dollars or euros. However, Bitcoin has several major differences with these fiat currencies:
1.) Bitcoin is decentralized. No government or central bank controls or regulates Bitcoin. It is a true person-to-person financial network maintained by volunteer software developers and stored on a network of computers and servers located around the world.
2.) Bitcoin is (mostly) anonymous for users. Traditional banking procedures require the users of electronic payments to be identified to minimize and prevent illegal actions such as money laundering and other fraudulent activities. As Bitcoin does not rely on banks or other traditional banking procedures, those involved in Bitcoin transactions do not need to identify themselves. However, as many wallets used to store Bitcoin require user authentication, companies and law enforcement may still be able to access identifying information from users. (Learn more about Bitcoin wallets and how to store Bitcoin here.)
3.) Bitcoin is scarce. Currencies such as dollars and euros have an unlimited supply (in theory) as central banks can issue more money into circulation in order to influence its value in the marketplace. In contrast, there will only ever be 21 million Bitcoin in circulation (as of authoring this publication, the current circulation is 16.8 million). Therefore, the value of Bitcoin will likely increase as the demand becomes greater than its limited supply.
4.) Bitcoin is uniquely divisible. Most fiat currencies are divisible to the hundredths value, for example, cents (.01) for the U.S. dollar. Bitcoin is divisible to the hundred millionths (0.00000001). This unit, named a ‘satoshi’, can be used for microtransactions in a way that fiat currencies cannot.
5.) Bitcoin transactions are immutable. Many financial institutions allow for electronic transactions using fiat currencies to be reversed. Bitcoin transactions are immutable, meaning that all transactions are final with few exceptions. This property may seem inconvenient at first, but Bitcoin’s immutability allows for transactional information to be almost impenetrably secure.