What are bitcoins really?

8 years ago an unknown person, who uses the pseudonym Satoshi Nakamoto invented an alternative means of payment – the so-called bitcoin. Untraditionally, this digital currency is not printed by governments but “mined” on computers.

Unlike the national currencies of dollars, francs or euros, bitcoins are decentralised means of payment. Thus bitcoin transactions are not conducted through a particular financial institution but via a complex computer network that includes all bitcoin owners. Like all currencies, bitcoins are also exposed to price fluctuations. Supply and demand determine the price and the fluctuation of the bitcoin value is significant.

“Miners” verify the transactions

The bitcoin transactions are made by the use of bitcoin wallets. These are software programs that send, receive and store bitcoins. Every bitcoin transaction is automatically registered and anonymously made public. The following list is generally available and serves the purpose of organising and controlling all global transactions. Bitcoin miners are responsible for it. They can be seen as vital security assessors, who group sets of bitcoin transactions into so-called “blocks” within a certain time period. This building of blocks enable the actual verification of a transaction. Without it, the bitcoins cannot be made available to the receiver of a transaction.

The miners’ block building work is very complex because every block must contain the solution to a difficult mathematical problem. To make matters worse, the time window for a successful calculation is limited: a miner only has 10 minutes to create an “official block”.

How are new bitcoins created?

If a miner solves the mathematical problem to a block, he or she is allowed to include this particular block in a so-called “block chain”. Here, the blocks are chronologically organised. The miner confirms the validity of the examined bitcoin transaction through a special type of watermark for bitcoins – the hash. This digital security seal indicates that the block has been created correctly: Fake transactions are excluded through the solution of mathematical problems.

The miners receive compensation for their work – currently 12,5 bitcoins per created block. Bitcoins are created on a steady basis increasing the total number over time. However, mining is becoming increasingly difficult because Satoshi Nakamoto limited the maximal number of bitcoins to 21 million. To date, almost 16 million bitcoins were mined – another 5 million can still be generated.