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What Is Bitcoin and Why Does It Matter?

by Akhil Kalepu

May 28, 2017

You may have read about the ransomware attack on England’s National Health Service, as well as tens of thousands of other computers in more than 100 countries. Hackers locked computers with encryption until a payment of $300 of Bitcoin was made through the ransomware software, which provided customer service so victims could figure out how to make the payment. The malicious attack reportedly prevented the NHS from accepting patients, painting Bitcoin in a negative light and shifting attention from its economic potential.

Answering the question, “What is Bitcoin?” is difficult, even for people in the tech world. It questions the philosophical basis of currency and value, forcing people to rethink what constitutes money itself. A mysterious programmer (or group of programmers) named Satoshi Nakamoto wondered the same thing, leading them to develop an open-source payment protocol with an accompanying digital currency. The “cryptocurrency” works on technology called the blockchain, a publicly distributed ledger of all transactions made on the network. This means everyone using the software works together to verify transactions and to ensure the numbers are correct.

The beauty of this system is its decentralized nature. Previously, our conception of money was of fiat money, currency issued by a centralized bank based in a nation-state, only to have value because its issuer has the authority to say it has value. Bitcoin has no centralized issuer. Satoshi Nakamoto wrote the protocol to contain a total of 21 million Bitcoins, released on a fixed schedule until sometime between 2110–2140. New Bitcoins are awarded to “miners” who verify transactions, package them into a “block” and add it to the blockchain ledger.

Now, the beauty of this system is also its downfall. Although Bitcoin is decentralized, several mining pools with access to large amounts of computing power and electricity own a large portion of the protocol, affecting decisions about how Bitcoin will operate in the future. The mining world is currently in the midst of a civil war, deciding how to scale the protocol for faster transaction times as more people join the action.

While this was an extremely shorthand explanation of how it works, what’s far more interesting is its real-world application. People can now send money to each other without banks, money transfers or currency exchanges getting in the way, but the decentralization and fixed supply of the cryptocurrency also means there’s no one to stabilize its value. The investing world is quickly buying into Bitcoin and a variety of other “altcoins” as a speculative asset, though prices are extremely volatile due to the unprecedented technology.

If you’re interested in using Bitcoin, more and more vendors accept it as a form of payment, and cryptocurrency exchanges like Coinbase make it easy to buy without knowing how the technology works.

— Akhil Kalepu, digital contributor and technology columnist

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