“This internet money system which involves neither banks nor government will do to finance what email did to the postal service and what the internet did to publishing. It will disrupt aging monopolies and open up new opportunities.”

Dominic Frisby, author of “Bitcoin: the Future of Money?”

If Dominic Frisby is correct and Bitcoin represents a disruptive force on the same scale as email and the internet, it will mark the most transformative technology of this new millennium. And yet, for many, Bitcoin is still an undiscovered and relatively unknown entity, as it has not yet replaced traditional currency on any significant scale. So what is it about this technology that threatens to upend the world’s financial system?

What is Bitcoin?

Bitcoin is a form of digital currency, commonly known as a cryptocurrency. It does not exist in any physical form but can be traded online as they are assigned a monetary value. They are not regulated by banks or any formal financial institution. Instead, they are monitored and verified by a vast online community. Bitcoin has been labeled the world’s first decentralized digital currency. In essence, owning Bitcoins is like owning digital gold nuggets that can be exchanged on the open market.

This potentially revolutionizing digital currency was first made public in 2009 by an anonymous person known only by the pseudonym Satoshi Nakamoto. Nakatomo first brought it to the world’s attention in an October 2008 paper titled Bitcoin: A Peer-to-Peer Electronic Cash System. A few months later in early 2009, Nakamoto launched the network and the very first bitcoins hit the market. There has been much speculation as to Nakamoto’s true identity, although nothing has been confirmed to date. It is widely believed that Nakamoto has the largest stockpile of Bitcoins, worth approximately $4.7 billion as of May of this year.

Why Blockchain is the Key

The lynchpin in making the entire Bitcoin system work is what is known as the Blockchain, a ledger system that verifies the ownership, value, and exchange of each bitcoin in existence. The Blockchain has three main components to its functionality:

  1. The Identifying Address – This is a 34-character address that is used to identify the individual owner of those Bitcoins. It should be noted that while each transaction can be traced back to an individual owner, the process is completely anonymous. There is no way of identifying the various Bitcoin owners.
  2. The History – This is simply the ledger that keeps a record of every purchase and exchange of Bitcoins. This gives Bitcoin a certain level of transparency as there can be no hidden or secret transactions.
  3. The Private Key Header Log – This is the digital signature that acts as Bitcoin’s primary security feature. Think of it as your email password on steroids. It is this digital signature which ensures the authenticity of each Bitcoin transaction.

Where do Bitcoins come from?

Bitcoins can be produced by anyone with a powerful computer. They are made through a process known as cryptocurrency mining and those who mint them are called miners. The reason why this process requires a powerful computer was expounded upon in an article in lifewire.com.

“Bitcoin mining involves commanding your home computer to work around the clock to solve ‘proof-of-work’ problems (computationally-intensive math problems). Each bitcoin math problem has a set of possible 64-digit solutions. Your desktop computer, if it works nonstop, might be able to solve one bitcoin problem in two to three days, likely longer. For a single personal computer mining bitcoins, you may earn perhaps 50 cents to 75 cents USD per day, minus your electricity costs.”

There is a cap on the total of number of bitcoins that can minted – production will stop once the number reaches 21 billion. Currently it is estimated there are more than 11 billion bitcoins in circulation.

How Does It Work In Practice?

Not surprisingly, the first step to dealing in Bitcoins is to acquire some for yourself. This can be done online either through designated exchanges or from other Bitcoin holders. Payment can be made in a variety of ways, although debit cards and wire transfers are the most popular methods. It is difficult to purchase Bitcoin through a credit card or PayPal due to concerns that the charges can be reversed immediately after acquiring the Bitcoins.

To store your newly acquired Bitcoins, you’ll need to get set up a Bitcoin wallet. Your wallet acts like an online bank account and can take different forms. The most basic involves a file stored on your computer’s hard drive. The inherent danger here of course, is if the hard drive crashes and cannot be recovered, the Bitcoin holder runs the risk of losing their entire Bitcoin stash. For this reason, some people have a cloud-based Bitcoin wallet. There is also a “vault” option which keeps the Bitcoins secure offline.

With a wallet in place, users can either collect and store Bitcoins or use them to purchase goods and services. Some major online retailers that have begun accepting Bitcoin in recent years include Overstock.com, Expedia, and Shopify.

The Bitcoin Advantage

The early appeal of this cryptocurrency technology lies in the ability to transfer currency to another person without a middleman such as a bank or PayPal, who charge fees for making those transactions. In addition, Bitcoin transactions are completely anonymous, which certainly has an appeal for those who put a premium on privacy, as there is no consumer profile that can be sold to other marketers or vendors.

But the real global appeal to Bitcoin may be in what it can provide to lesser developed regions where access to global financial institutions is limited. Dinis Guarda is the CEO at Humaniq, a blockchain and fintech startup. Earlier this year, he shared his views on the future of this technology in an article in Forbes.

“Cryptocurrencies can better adapt to the prevalent challenges of both funding and the emerging digital economy in addition to being a way to engage communities through P2P tech and crowdfunding platforms. There are over 2 billion people without access to the financial economy and even basics of modern civilization. Here at Humaniq, we [are] aiming to tackle some of these challenges by tapping into the power of digital currencies to leverage social impact.”