HomeOpinionBitcoin is Changing the World of Banking

Bitcoin is Changing the World of Banking

Bitcoins are an electronic virtual currency that can be used to purchase items anonymously. The price of one bitcoin fluctuates constantly, but as of September 1st 2012, the current exchange rate is 10.98 USD/bitcoin with a market capitalization of roughly 2 billion US dollars. Bitcoins are created by mining – any computer can do it if it has a fast enough processor and free software installed. The way the trading app system is set up, only a finite amount of bitcoins will be generated by mining: 21 million to be exact.

Blockchain

Because there is a limit on how many can exist and because they’re exposed in transactions in an open ledger (the blockchain), people are willing to pay real money for them, just like they would with any scarce resource: that’s why their value keeps increasing. This makes bitcoins attractive to speculators who buy large amounts when prices go down and earn a profit when the price goes up. But what does this have to do with banking? Bitcoins could become an alternative currency used by consumers for everyday purchases such as groceries or haircuts. At least four grocery stores in Vancouver accept bitcoins, and you can find a growing list of businesses that do on the Bitcoin wiki. Some analysts have even predicted that bitcoins could replace US dollars in transactions with some developing countries.

The blockchain is what makes bitcoin special; it’s the public ledger where all transactions are stored. It serves to confirm transactions happened correctly and ensures no bitcoins were created out-of-thin-air (a process called “double spending”). But how does it work? Every computer running bitcoin software has two important tasks: mine for new bitcoins and record transactions into the blockchain.

(Selfish) Miners want their own transactions to be recorded in blocks first because they get more profit that way; they don’t care about anything else (and by extension, they don’t care about how much computing power they consume in the process). To make sure miners work honestly, a custom algorithm was included in the bitcoin software called “Proof-of-Work”. In this step, all computers must prove that they never backdated any transactions. They do this by repeatedly running a hashing function on data from blocks until it matches a specific pattern (like when you keep guessing the word “house” but it’s not there, then when you guess “horse”, it magically appears because you found the right key).

But what is a “hashing function”? A hashing function takes input data and returns output data of fixed size. For example, an 8-character code made out of only numbers can be generated using SHA256, a hashing function included in bitcoin software.

 

How Much Is Bitcoin Worth?

Bitcoin is a digital and global currency. It allows people to send money across the internet without having to worry about chargebacks or fraud. Bitcoin is also a deflationary currency, meaning that its value increases over time.

Bitcoins are generated all over the world by anyone running a free application called a Bitcoin miner.

Bitcoins are mathematically generated as the computers in this network execute difficult number-crunching tasks, a procedure known as Bitcoin “mining”. The mathematics of the Bitcoin system were set up so that it becomes progressively more difficult to “mine” Bitcoins over time, and the total number that can ever be mined is limited to around 21 million. There is therefore no way for a central bank to issue a flood of new Bitcoins and devalue those already in circulation.

One primary disadvantage is that while inflation goes down as more currency units are created, at some point there will be so many units outstanding after reaching 21 million that inflation will increase.

Bitcoins are traded for goods or services with sellers who accept Bitcoins as payment, and Bitcoins can also be purchased directly from an exchange with your bank account. Bitcoins can also be mined (more on this later) by anyone who has access to the internet and suitable hardware.

The value of Bitcoin is typically denoted by its relative position in comparison to other currencies, often referred to as “Bitcoin” (with a capital “B”). For example, $986.54 USD/BTC means that 1 BTC is valued at $986.54 USD at current market rates while €648.69 EUR/BTC would mean 1 BTC is valued at €648.69 EUR at current market.

 

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