cryptolugia

When it was launched, Bitcoin (BTCUSD) was envisaged as a medium for daily transactions by its inventor, Satoshi Nakamoto. The idea behind a decentralized cryptocurrency was to eliminate centralized control of money from government agencies and ensure speedy processing of transactions.

More than a decade later, observers are questioning whether the cryptocurrency has failed to live up to that promise. Very few daily transactions are conducted using Bitcoin as a medium of exchange.1

But the idea of an alternate currency, outside the purview of governments and federal agencies, is powerful. Recent developments in Bitcoin technology, such as Lightning Network, have the potential to return Bitcoin to its original promise. The number of places accepting Bitcoin has increased as the cryptocurrency’s technology and name recognition have evolved. You can buy a surprising number of things using Bitcoin.2

Bitcoin is designed to offer users a unique set of advantages over other payment methods. We’ll take a closer look at those below, but before we do, it is useful to explore what Bitcoin, the cryptocurrency, actually is. By understanding Bitcoin’s design principles, it will be easier to see the advantages of using Bitcoin for payments.

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What Is Bitcoin?

Bitcoin is a decentralized, peer-to-peer cryptocurrency system that processes transactions through digital units of exchange called bitcoin. It was invented in 2009, and the Bitcoin network has come to dominate and even define the cryptocurrency space, spawning a legion of altcoin followers and representing for some users an alternative to government flat currencies like the U.S. dollar or the euro, or pure commodity currencies like gold or silver coins.3

Part of the reason for Bitcoin’s attraction to these followers is its decentralized status: It is not controlled or regulated by a central authority. This immediately distinguishes it from fiat currencies, which are issued by central banks and backed by the government. Fiat currencies are also disbursed into a given economy through institutions like banks that are beholden to government regulations for their operations.

On the other hand, Bitcoin creation and disbursal does not depend on government fiat. Payments involving Bitcoin are processed through a private network of computers linked through a shared ledger. Each transaction is simultaneously recorded in a “blockchain” on each computer that updates and informs all accounts. The blockchain serves as a distributed ledger and obviates the need for any central authority to maintain such records.

Bitcoins are not issued by a central bank or government system like fiat currencies are. Rather, bitcoins are either “mined” by a computer through a process of solving mathematical problems or algorithms are used to verify transaction blocks to be added to the blockchain. Bitcoin can also be purchased with standard national money currencies and placed into a bitcoin wallet that is accessed most commonly through a smartphone or computer.

What is Cryptocurrency?

A cryptocurrency is a digital or virtual currency that is meant to be a medium of exchange. It is quite similar to real-world currency, except it does not have any physical embodiment, and it uses cryptography to work.

Because cryptocurrencies operate independently and in a decentralized manner, without a bank or a central authority, new units can be added only after certain conditions are met. For example, with Bitcoin, only after a block has been added to the blockchain will the miner be rewarded with bitcoins, and this is the only way new bitcoins can be generated. The limit for bitcoins is 21 million; after this, no more bitcoins will be produced.

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Benefits of Cryptocurrency

With cryptocurrency, the transaction cost is low to nothing at all—unlike, for example, the fee for transferring money from a digital wallet to a bank account. You can make transactions at any time of the day or night, and there are no limits on purchases and withdrawals. And anyone is free to use cryptocurrency, unlike setting up a bank account, which requires documentation and other paperwork.

International cryptocurrency transactions are faster than wire transfers too. Wire transfers take about half a day for the money to be moved from one place to another. With cryptocurrencies, transactions take only a matter of minutes or even seconds.

A Brief History of Cryptocurrency

In the caveman era, people used the barter system, in which goods and services are exchanged among two or more people. For instance, someone might exchange seven apples for seven oranges. The barter system fell out of popular use because it had some glaring flaws:

People’s requirements have to coincide—if you have something to trade, someone else has to want it, and you have to want what the other person is offering.

There’s no common measure of value—you have to decide how many of your items you are willing to trade for other items, and not all items can be divided. For example, you cannot divide a live animal into smaller units.

The goods cannot be transported easily, unlike our modern currency, which fits in a wallet or is stored on a mobile phone.

After people realized the barter system didn’t work very well, the currency went through a few iterations: In 110 B.C., an official currency was minted; in A.D. 1250, gold-plated florins were introduced and used across Europe; and from 1600 to 1900, the paper currency gained widespread popularity and ended up being used around the world. This is how modern currency as we know it came into existence.

Modern currency includes paper currency, coins, credit cards, and digital wallets—for example, Apple Pay, Amazon Pay, Paytm, PayPal, and so on. All of it is controlled by banks and governments, meaning that there is a centralized regulatory authority that limits how paper currency and credit cards work.