Bitcoin is a type of cryptocurrency. The exchangeable coin aspect is often denoted in lowercase as bitcoin, whilst the network is denoted Bitcoin. bitcoin is effectively a currency like any other in that it can be bought, sold, exchanged for goods or services, extended credit, etc.
The former problem with this type of currency is its virtual nature. Prior to solutions made by Bitcoin’s creator(s) coupling numerous methods together, digital currency was easily copied and therefore subject to fraud. In the case of bitcoin, there are no digital coins signifying a bitcoin, but rather the exchange made between users implicating its existence. The users own keys to the specific coin in the network which are stored in a digital wallet. By transacting with a bitcoin a user is figuratively signing a blockchain ledger.
The blockchain ledger coupled with the bitcoin protocol is a decentralised peer to peer system thus implying no central authority overseeing transactions. The only facilitation is that of miners who utilise computing power to verify transactions through the solving of mathematical problems generated by the transactions. By doing so, the miners are rewarded with new coin. Mining decentralises the need for a central authority to issue currency and clear transactions.
Bitcoin solves the problems of trust and incentivisation in conventional economic systems. For example, if an individual wants to purchase something from a stranger, especially over the Internet, they may not be willing to pay them directly without the inclusion of some trusted third party such as a bank or PayPal.
However, this can incur costs in order to transact, whether to the intermediary or the individual. In the case of Bitcoin no intermediary is required due to the trust the users can place in the decentralised reinforcement and non-fungible nature of the network. This coupled with the reduced cost of verification of transaction through the inherent mining process makes Bitcoin attractive as a means of exchange.
Antonopoulos, A.M., 2017. Mastering bitcoin: Programming the open blockchain. ” O’Reilly Media, Inc.”.
Narayanan, A., Bonneau, J., Felten, E., Miller, A. and Goldfeder, S., 2016. Bitcoin and cryptocurrency technologies: a comprehensive introduction. Princeton University Press.