To understand what bitcoin is, we must first understand what the money is. It seems the most intuitive thing in the world, but this concept so necessary and used in everyday life still has incoherent, almost esoteric features.
Let's go back a few thousand years ago: then, in the hostile habitat of hunters-gatherers and first farmers, the money did not exist as we know it today. Then the bargain prevailed, the direct exchange between various goods. Over time, in practice, a number of goods have begun to be used very often in these exchanges, so in addition to their intrinsic value, they have gained a new dimension of value, the means of exchange: in the first communities these things were represented animals, cereals, tools and later precious stones, stone beads, shells, animal skins, multicolored feathers, etc.
Thus, proto-money has emerged, and the trend has been to find exchange facilities that make it possible to make exchanges more efficient by a few key features: have a high value over a small size and are easily divided into comparable subdivisions. The precious metals were the following objects that respected these characteristics and consequently their use as money was made on a large scale. Let us understand from now on another essential characteristic of money from the very beginning: the objective value of exchange that they obtain through recurrent social customs, which fundamentally differ from the intrinsic primary value of the currency-operated object. This objective value can be doubled by an intrinsically more recognized value (as in the case of precious metals) or less (as in the case of stones used as credit for indigenous peoples in Yap islands).
Whatever the object used as money in transactions, it had a physical, material, palpable, and in most cases had an intrinsic value independent of the exchange value.
The next fundamental step in the evolution of this concept was the renunciation of intrinsic value. The dematerialisation of money is the beginning of the modern concept which began with the renunciation of precious metals as money and the transformation of money into a dematerial exchange environment. This is briefly the modern monetary paradigm: fiat money, the intangible creation of money by the central-commercial banks system through the mandatory reserve mechanism. The only value that this type of money holds is the trust of the population in the institutions that emit the money.
The history of modern financial crises is the deterioration of confidence in the mechanisms whereby the "fiat" curtains lie higher or lower depending on the perceived needs of the economy. Issuing them depends on a series of monetary and economic policies, which are not intuitive and ultimately depend on the decisions of some people about how much money should be in circulation. Theoretically the money that can be issued can not be limited (with the inflationary consequences of rigor and systemic risk).
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In this context, bitcoin can be defined as a virtual form of limited electronic crypt-coin that eliminates the problem of "trust" characteristic of Orthodox coins through a decentralized, encoded and depersonalized transaction system. The emphasis here is not on the currency itself, which is just a convention, but on the global payment network that represents the bitcoin infrastructure. Just as Mastercard or Paypal networks allow the transmission of electronic money between parties, the bitcoin network also transfers electronic payments between exchange participants.
There are some fundamental differences to the current Orthodox electronic payment system:
The bitcoin network is decentralized: there is no central authority, institution or person to manage these transactions (such as the European Central Bank for Euro transactions)
Electronic transactions in the Bitcoin network are not based on an Orthodox currency (such as Paypal where you can pay only one of the coins accepted by the world financial system) but has its own account unit called bitcoin
The maximum number of bitcoins that can be created at any time can not exceed 21 million. Unlike dollars, for example, which theoretically can be created in an unlimited volume, the bitcoin network can produce no more than 21 million units (currently around 15.2 million euros are in circulation).
The emergence of bitcoin is still shrouded in mystery, credited with this creation being the mysterious Satoshi Nakamoto, whose real identity is unknown (can be an individual or a group) through the famous online Bitcoin: A Peer-to-Peer Electronic Cash System signed by Satoshi Nakamoto (if you want to write it, it has an email address - satoshin@gmx.com, but do not be disappointed if it will not answer you).
To understand how bitcoin works, we need to understand how the electronic infrastructure that supports this currency works: the blockchain. This blockchain is actually the fundamental innovation behind the bitcoin. Because a complete explanation requires some degree of computer scientist and brain as far as I am concerned, I will try to explain just a few fundamental features of this system: the blockchain is a public network shared by bitcoin transactions involving millions of computers (called nodes) and where communication is achieved through the peer-to-peer system (it will call you, yes, the same system that allows, for example, the existence of well-known file-sharing programs).
All the bitcoins transactions that have ever existed are recorded in this blockchain and each computer (node) on the network holds each copy of these transactions. When a new bitcoins transaction occurs, the information about it is sent to all computers in the network where they are checked by certain keys (signatures). Then all computers receive a mathematical problem for which it requires a computing power directly proportional to the number of bithocks in circulation. The problem-solving node (computer) announces the resolution of all the others through a peer-to-peer system, the transaction is validated, and the computer that resolved the problem receives a number of bitcoins (now 25) as a reward. After that, we analyze the next transaction. This is actually the only way in which new bitcoins can be created, and this process is called "mining" to remind of the period when gold worked as a currency, and gold transactions led to investments in gold mines to put even more much gold in circulation.
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For a clearer understanding of the concept of trading underlying bitcoin, let us return to the population of the Yap islands that I mentioned at the beginning. Milton Friedman uses this example in the Money Mischiefs series: Episodes in Monetary History to explain the idea of money itself, but the curious financial habits of the inhabitants of the Yap archipelago can be used as an allegory for bitcoins.
For the transactions they make, these people use a certain type of limestone stone as a means of exchange. The whole community recognizes these "money" and the transactions are dematerialized in the sense that the stones that are being exchanged are no longer transported from the buyer to seller due to their massive size, but simply the series of transactions are recorded through public notices so that each member of the community knows that the massive stone on Hill X belongs to the person Y. In this way, the public validation system of the blockchain , each transaction being made public through peer-to-peer advertising.
Anyone can see how this system works directly. Sites like Biteasy.com, Blockchain.info, or Bitcoin Block Explorer show the last "blocks" added to the blockchain; it can be seen that the number of blocks added in one hour is 6 on average.
Though seen as a currency of the future, bitcoin is still functioning more like an exotic asset. Common transactions are still limited, although there are sites that accept this currency, but most use it for its speculative and volatile nature. Over the past three years, the bitcoin value (in US dollars) fluctuated from $ 200 in 2013 to a maximum of $ 1150 in 2014 to drop to $ 380. This is also the main criticism of this system, the fact that being decentralized there is no assurance of the value of the investment and if the risk factors materialize your investment in the bitcoin turns into a final loss without the possibility of being saved by any central bank or a guarantee fund, as is the case with regular bank deposits. And the risk factors can be the intrinsic visibility of the system, the possibility of hacking or the emergence of competing platforms. In addition, as the network becomes more popular, problems arise over the time that transactions are processed; if a transaction is normally processed in less than an hour, there have been cases where vendors have waited for up to 12 hours. Given that competing platforms such as Mastercard or Visa perform millions of transactions per hour, Bitcoin is limited to a few thousand. Too little for now.
On the other hand, the independent nature of this coin makes it sympathetic to the nostalgics of the gold standard and to the Austrian School of Economics because bitcoin is essentially a free currency extracted from the guardianship of any regulatory authority and whose issuance does not depend of any monetary policy. In this sense, bitcoin is seen as an antithesis to the modern financial institution, which may suffer fatal systemic crises like the one in 2008, on which the very nature of inflation is the official electronic currency.
