Bitcoin is attracting people from all walks of life, from small entrepreneurs to global investors. But what is it really? And perhaps the most important question of all – is it reliable?
Bitcoin, unlike traditional currencies, is highly decentralised and functions without government regulation or central banks, underpinned by a peer-to-peer computer network made up of its users’ machines. Bitcoins are mathematically generated as computers in the network crunch numbers to find solutions to an algorithm, a procedure known as “mining”. The algorithm works in such a way that it becomes progressively harder to “mine” bitcoins over time1 . A useful analogy would be the search for prime numbers: it is fairly easy to find small prime numbers, but finding large prime numbers becomes progressively harder
When a solution is found, the miner obtains a transaction fee as well as a fixed amount of bitcoins, which progressively shrinks as more bitcoins around the world are mined2 . The twin effects of increased computational difficulty and a shrinking bounty awarded to miners combine to reduce the rate at which this crypto-currency is produced (or mined) over time. The total number of bitcoins that can ever be mined is limited to around 21 million (currently, 12.5 million have been mined) – a feature of the currency that was thought up to ensure that no central monetary authority can issue a flood of new bitcoins and devalue those already in circulation1 .
