Bitcoin is a digital type of currency, but it is not the same as other forms of digital money like credit cards, wire transfers, Paypal, or other electronic services. Those are all controlled by banks, using a “centralized” ledger that keeps track of who owns what. Each account holder is tracked in this ledger, along with every transaction they make with their account. Each bank has its own ledger, kept on their own computer system, and depositors trust the banks (and their computers) to be accurate, legal, and fair. This type of currency is also called fiat money. It is made legal tender by a government decree.
The Gold Standard
Historically, the value of paper money was backed by gold. If you gave the bank your bar of gold, worth, say $100, the bank would give you paper bills that equal that $100 value. This was known as commodity money, or money backed by a physical commodity that has value. Beginning in 1933, the United States began to move away from this gold standard, and by 1971 there was no more link between gold and the dollar. Today there are no countries who back their currency with gold. Instead, the paper money is backed by a promise from the government.
Digital Currency and Trust
As long as the public has confidence and trust in the government and the banks, paper currency is accepted as money worldwide. This legal tender is backed by the full faith and credit of the government.
In 2008, an unknown person or persons using the name Satoshi Nakamoto published a whitepaper introducing his idea called Bitcoin: A Peer-to-Peer Electronic Cash System. This system was created to allow payments to be sent from one party to another without going through a financial institution.
With digital money, a problem called “double spend” arose where digital files could be copied and spent more than once, like counterfeit money. Bitcoin was created to eliminate the double spend problem by creating a process where every transaction is publicly verified by thousands of computers and stored in a public ledger, also known as the blockchain. There is no one computer, company, bank, or government that holds the ledger. This decentralization is what assures the veracity and reliability of every bitcoin transaction. And while the transactions are public, the identity of the people making the transactions is not.
If you would like to learn more about how Bitcoin is generated, there is an excellent explanation of the Bitcoin mining process here.
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