A cryptocurrency (or crypto currency) is a medium of exchange that uses cryptography (think mathematically functions) to secure transactions and control the creation of new units. Cryptocurrencies are a subset of alternative currencies, or specifically of digital currencies. Bitcoin is the first decentralized digital cryptocurrency which began its existence on January 3rd, 2009. One of the reasons why it’s such an attractive currency is the fact that it is “decentralized” which means that it is not regulated by individual financial institutions, however that doesn’t mean that the currency is not regulated at all; it is regulated by thousands of volunteers from around the world who dedicate computer systems to manage the bitcoin system. The bitcoin system put simply is a huge ledger that contains all bitcoin transactions that have ever taken place and everyone on the bitcoin network has a copy of this ledger; Every-time a transaction takes place that ledger is modified. For example: If James wants to send Lola 10 bitcoins, the system would remove 10 bitcoins from James’s account on the ledger and then add 10 bitcoins to Lola’s account.
Another reason why bitcoin is so attractive is because of its security and the integrity of the system due to its cryptographic basis. Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While this system works well enough for most transactions, it has weaknesses due to its trust based system. Whenever there is an issue with transactions between entities these institutions must mediate and the cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions. These costs and payment uncertainties can be avoided in person by using physical currency, but no method exists to make payments over a communications channel without a trusted party. What bitcoin does is that it makes an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party like a bank. These transactions are computationally impractical to reverse which will protect sellers from fraud, and regular escrow mechanisms could easily be implemented to protect buyers. It also avoids the need for a centralized body managing the currency by implementing a peer to peer system that makes it impossible for double-spending to take place. Double spending was an issue back in the early days of digital currency because an individual could purchase two things from different places at the same time and would only be charged one amount because of the different timestamps of the transactions.
The peer to peer system is a very fundamental part of bitcoin because this system is not only responsible for preventing all kinds of fraud, it is responsible for creating new bitcoins to be circulated in the network. The thousands of individuals also known as bitcoin miners who manage the bitcoin ledger system are not investing thousands of dollars’ worth of equipment for nothing. The bitcoin system rewards these individuals with bitcoin for every transaction they add to the chain of transactions in the bitcoin system. In order to add a transaction to this chain their computer systems have to be the first to solve a mathematical puzzle; these puzzles use up computational power and this determines the order in which pending transactions would be processed. This amazing peer to peer system creates a system that is secure as long as honest computer systems collectively control more CPU power than any cooperating group of attacking computers (Hackers).


by: Pemisin Bandy-Toyo

http://economicplatform.ng/what-is-bitcoin/