Bitcoin is digital money. For euros and dollars (and other currencies) there is both a digital version (bank account) and a tangible version (paper money and coins). Only a digital version of bitcoin exists. It is therefore not possible to pay in bitcoin with paper money or coins.
The bank account and the bitcoin account
Just as you can have a digital account with a bank, you can have a digital account that contains bitcoins. To place bitcoins on this account, you can exchange euros or dollars for bitcoins at an online exchange office. Just as you can log in to your bank with a login and password, you can also log in to a bitcoin account. The big difference is that the bank has access to all your money and transactions. If the bank wants to freeze your account, use your money to finance weapons or do any other harm, they can do so. The power over your money lies with the bank. This is not possible with a bitcoin account. Only you have access to it. The power over your money lies with you.
Transactions
As soon as money is in a digital account with a bank, transactions can be made with it. For example, you can log in to the bank's website and give instructions to transfer money from one bank account to another bank account. The bank writes off the amount in euros from one digital account and credits it to the other digital account. For example, you can say that the bank keeps a list of transactions.
With a bitcoin account this is the same. After logging in to the digital bitcoin account, transactions can also be made to other bitcoin accounts.
The big difference lies in who keeps track of the transactions. With bitcoin, there is no central bank that has a list of all the transactions that have ever been executed. Instead, the list of transactions is maintained by 1000's of computers, all with exactly the same list.
How is that possible? If a new transaction is made, it will be added to the list of transactions. The new list is then sent to all other computers so that the list is the same everywhere. In addition, it is checked whether there is enough money on the bitcoin account before it is debited.
Risks
At a bank, the power and control of the transactions and account lies with one party, namely the bank. If a bank wants to do harm, they have the opportunity to do so. At bitcoin power and control lie with 1000's of computers. Only if the majority of the owners of these computers would like to do harm (more than 50%) can they do so. This is about 1000's of computers of different people. It is therefore relatively difficult to convince 50% of all these people to do wrong. Anyone can contribute to the bitcoin network. You can install a program on your computer which also keeps a list of transactions.
Only if all computers in a bitcoin network would fall out then payment traffic would come to a standstill. If a number of computers were to fall out, the network would still be maintained by the other computers. This is the strength of a decentralised network. The more computers track these bitcoin transactions, the more resilient and powerful the network is.
- Access to your account: Suppose a hacker wants to access your bank account, a hacker has to hack into the bank's central system. Suppose a hacker wants to access your bitcoin account, a hacker must be able to access the computers of more than 50% of the network. These are 1000's of computers.
- Stop all payment transactions: Suppose a hacker wants to stop all payment traffic of a bank, the hacker must attack the bank's website so that it is no longer accessible (you can no longer log in to your account). To stop the payment traffic at the bitcoin network, a hacker would have to hack and disable 1000's of computers to stop the network.
Transparency
All transactions between bitcoin accounts are transparent to everyone in a bitcoin network. You can see from which bitcoin account to which bitcoin account how much bitcoin has been transferred. However, you do not know who holds the bitcoin account (it is only a number). Only when you find out which person has which account, you can trace an account number back to a person and see all his transactions.
How are bitcoins created?
Bitcoins are created by having a computer calculate a difficult sum. The computers take part in a race, in which every 10 minutes a difficult sum has to be calculated. Which computer successfully calculates the sum will get 25 bitcoins. However, this is a very difficult sum and there are 1000's of computers taking part in this race. So it can take a long time before 1 computer wins this race once. The bitcoins will then be credited to the bitcoin account of the winner. There is no need to create bitcoins yourself. It is also possible to exchange dollars or euros for the bitcoins that have already been created at an online exchange office.
The value of bitcoins
Like any other currency, bitcoin has a value. This value is determined on the stock exchange like any other currency. At the time of writing, 1.17 dollars is worth 1 euro and 1 bitcoin is worth 7,499 dollar. The value of bitcoin fluctuates quite a bit, because the market is still very small. Few people actually use the bitcoin as a means of payment and if few people use the bitcoin, prices can rise and fall sharply. This is expected to decrease with the number of people using bitcoin.
Bitcoin advantages
- The management of your account is only accessible to you.
- No trust is needed in a third party. You know what happens to your money.
- Transfers of money outside office hours and at weekends are always possible. The network operates 24 hours a day, 7 days a week.
- To transfer money to another bitcoin account, an average of 10 minutes is required.
- The transaction costs of bitcoins can be very low, a few cents per transaction.
- Transferring money abroad is easy.
Bitcoin disadvantages
- Your money is not insured. Thanks to the bank insurace you are insured up to 250,000 dollar, for example with a bank in the United States.
- The price of the bitcoin still fluctuates very much.
- At the moment it takes a lot of power consumption to run the network.
- You can't overdraw your account (although this could also be an advantage).
- All transactions are transparent (however, you do not immediately know who the owner of an account is).