What is Bitcoin? | IslamicFinanceGuru
What is Bitcoin?
As part of our work on halal investment at IFG we are covering cryptocurrency and blockchain technology in a lot of detail. You can read all of the series of our article on this topic here.
In this article we give an introduction to what Bitcoin actually is and provide a brief overview of its pros and cons.
The origins of bitcoin
Influenced by a paper written under the pseudonym ‘Satoshi Nakamoto’, Bitcoin was created as a digital currency after the 2008 financial crisis. Looking back, a decentralised currency made a lot of sense. Given the growing public anger towards increased government centralisation, surveillance, and control; it was only a matter of time. The genesis block (first block) was created in 2009.
The Nakamoto paper outlines how bitcoin can work through a peer-to-peer system and eliminate financial market inefficiencies.
The role of blockchain is central to this. It can keep track of all transactions and use nodes to verify it. The database is available for anyone to view.
Today, Bitcoin is an independent open source project. Bitcoin user consensus controls the software. Developers may improve the system, but they cannot change the rules.
Key features of bitcoin
- It is a decentralised currency – Bitcoin offers a currency that is free from centrally controlled bodies that may mishandle or misuse it.
- It works over a peer-to-peer network. P2P allows users to verify transactions, trust, and work together without the need for a central intermediary authority.
- Network nodes (users) validate transactions and record them on a publicly distributed ledger – otherwise known as a blockchain.
How to receive and send Bitcoins
When you create an account, you generate a ‘key pair’ which includes a public and private key. The public key is your account address, and your private key is your proof of ownership. You have the option of downloading a bitcoin wallet on your phone or computer.
You can get bitcoins by transfer or through a trusted bitcoin exchange. There are also Bitcoin ATMs which you can search for on ‘coinmap.org’. Single way ATMs only convert fiat money for bitcoin while two-way ATMs work both ways.
Search engines like ‘spendabit’ find products that accept bitcoin payments.
BitcoinWide.com provides access to businesses, organisations, and individuals who accept bitcoin or other cryptocurrencies. Other sights like cryptogrind, coinality, and bitwage allow users to work for/ gain part of their paycheck in bitcoin.
Before sending bitcoin, you would need to sign off with your private key to prove you are authorised to do so. The request broadcasts to bitcoin miners who verify the transaction and then share it with all other nodes. Miners have to use the proof of work method to verify it.
Once verified, the transaction is added to a new block and is final. Bitcoin transactions cannot be revoked or reversed. For more detail, check our article: how does blockchain work.
Pros of Bitcoin
- Secure- bitcoin is encrypted and are only accessible for sending through the private key. The strong cryptographic verification makes it impossible to break the system. Because bitcoin transactions are public, it makes it even more difficult to misuse the system.
- International transactions are easier and faster – with no international transaction fees and less red tape, sending bitcoin abroad is relatively easy.
- Transaction fees are lower than traditional digital payments.
- Anonymity and independence
Cons of bitcoin
- Scaling problems- the block size limit is 1mb, which limits the number of transactions included within each block. To put that into perspective, VISA can handle thousands of transactions per second, whereas Bitcoin can only do seven. During busy periods, transaction fees and verification times may increase.
- No refunds or chargebacks. Other cryptocurrencies such as Ripple have some basic refund features.
- Not environmentally friendly- the proof of work authentication method uses an extremely high amount of energy. As of 2019, Bitcoin mining consumed more energy than Switzerland.
- Historically Bitcoin has high price volatility. It is unsuitable for investors with long term horizons.