How Bitcoin Works


Bitcoin is Just the Beginning
Is the world ready to embrace Bitcoin's decentralized currency model? R.Tsubin/Getty Images

The sharp peaks and valleys in Bitcoin's value are clear warning signs that this new cryptocurrency is anything but stable. Until more people actually use the currency to buy things, as opposed to speculating in the currency itself, it's difficult to say what role Bitcoin will play in the future economy.

Is the world really ready to ditch our centuries-old paper and coin, government-backed monetary systems for a purely digital currency? Or will the blockchain technology behind Bitcoin prove more revolutionary than the currency itself?

Bitcoin's success as a speculative commodity has opened the floodgates to hundreds of new cryptocurrencies, each competing for a niche in the market. As we mentioned earlier, some differentiate themselves by their deep encryption and anonymity. Others boast faster transaction processing speeds. But the most promising Bitcoin alternative to date is something called Ethereum.

Ethereum is less of a pure currency than a full-service financial platform. Unlike Bitcoin, you can't use Ethereum's currency (called ether) to buy stuff in the real world. The real power of Ethereum comes from its next-generation blockchain technology and robust programming language. Economists are excited about the potential for Ethereum to usher in an era of "programmable money" and "smart contracts" that run on cryptocurrencies. Again, the underlying blockchain technology may be the game-changer, not the currencies themselves.

Whether it's Bitcoin, monero, dollars or euros, our global economy requires all of us to trust a system of currency that makes sense. Perhaps the future of money is going to be a lot more fluid, with electronic transactions processed on a secure, decentralized blockchain in every currency imaginable.

But before that happens, Bitcoin and other cryptocurrencies will need to address their energy problem. All of the computing power required to mine and verify Bitcoin leaves a huge carbon footprint. Environmental watchdogs calculate that a single Bitcoin transaction consumes as much energy as nine US homes burn through in a full day [source: Digiconomist].

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