Bitcoin is the world’s first digital currency* or “cryptocurrency” and was initially created to “compete” with “Hard” or “Fiat” currencies.
Most “Hard/Fiat” currencies that exist in the world today (such as dollars, euros and yen) are currencies that are issued by the central bank of those countries. For example, the Department of the Treasury has authority in the United States to “print dollars” – these are then distributed via the banking system to people like you and me. We then either use these dollars as a form of storage of value (such as money sitting in your savings account) or as a form of barter (such as when you get paid at work and use those dollars to pay for your gallon of milk). The ECB (European Central Bank) issues euros, and the Bank of Japan issues yen. Hence the name “Fiat’ currency.
Bitcoin, on the other hand, is the world’s “first decentralized digital” currency that has not been issued by any central banking authority. Bitcoin was created by someone called Satoshi Nakamoto (nobody knows who she or he really is) in 2009 while the world was undergoing a massive financial crisis. Bitcoin has no central monetary authority, and is supported by a peer-to-peer computer network, also referred to as a distributed ledger. A Bitcoin can be “mined” in this network via the execution of super complex number-crunching tasks, and it becomes harder to progressively “mine” Bitcoins over time. The total number of Bitcoins that exist today are capped at 21 million. This protects the supply of Bitcoin – that is to say, the value of a Bitcoin goes up as more and more people desire to own it. Also, since there is no central banking authority, the value of a Bitcoin can’t be diluted by any additional issuance.
Since Bitcoin operates on a “distributed” network, there is no central depository or register, and all transactions are broadcast across the entire network. Computers participating in the Bitcoin network (called the blockchain) simultaneously update and log all transactions. This theoretically eliminates any chance of fraud or dispute, given that there is only one distributed ledger for all to see.
If you want to learn more about Bitcoin, we suggest reading the original white paper created by Satoshi (yup, we’re on a first name basis). You can find it by clicking here.
*PS – while for all practical purposes Bitcoin is a currency, the IRS does not recognize it as a currency. For tax purposes, it is treated as a “commodity” such as gold, which means that you pay full federal income tax rates when you have a gain on the sale of Bitcoin (as opposed to capital gains).
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