Bitcoin is a peer-to-peer network that facilitates transactions between parties minus the proof requirement of an appointed third party (i.e., banks or financial institutions). Accurate understanding into the implementation of bitcoin can be acquired from data of the universal record of bitcoin transactions. Although data from numerous websites show that bitcoin daily transactions count has reached capacities of tens of thousands, it is widely believed that most of these transactions comprise activities between speculators and only a few are actually used for trading of goods and services. The chapter explores if bitcoin has achieved the characteristics of money. For it to survive, bitcoin must overcome the problems of its unconventional pricing mechanism, shortage of vendors who accept it, and the circuitous way of obtaining it.
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Essentially, bitcoin is a peer-to-peer network version of e-cash that facilitates transactions between parties minus the proof requirement of an appointed third party; i.e. banks or financial institutions. This unit of network is denoted as bitcoin, which is considered by most to be the greatest digital currency to date (Brito & Castillo, 2013; Lo & Wang, 2014).
The advantages that bitcoin (Rogojanu & Badea, 2014) seems to offer are: 1) it is believed to be a completely decentralized method not linked with any predominant bodies, central banks, or recognized payment systems, which are ruled by banks and therefore it is thought to be less susceptible to exploitation or fraud; 2) it has pseudonymous characteristics; 3) it forces no direct charges on transactions and shows the possibility for transaction fees in general to be lesser. A person can use a bitcoin, by sending his or her account number which is the “public key” and a password which is the “private key” for authentication on the public transaction record, known as the ‘”block chain” (Reid & Harrigan, 2013) Certain individuals or “miners” will then use their computers processing power to authenticate if the transaction is real by solving a rigorous computational task also known as “finding the hash of a nonce” (Lo & Wang, 2014). As a payment for validating the transaction, the first person or party to provide the answer to the task will be compensated with a certain number of bitcoin, accumulating to the available stock of bitcoin and consequently generate money creation.
There is a process in the system, which routinely regulates the computational difficulty of validating transactions to guarantee that each transaction is normally verified within 10 minutes (Bamert, Decker, Elsen, Wattenhofer, & Welten, 2013). However, it is unavoidable that there are some uncertainties in the actual extent of time taken to verify each transaction. The same process also dictates the eventual quantity of bitcoin, which is estimated to be 21 million units by 2140.