Bitcoin is a type of virtual currency that is completely digital, there are actually no physical coins. This digital currency system is intended to give people who work online the capacity to carry out business transactions more open and freely. Bitcoin was introduced in 2009 by an anonymous programmer hiding under the name Satoshi Nakamoto. It is not regulated by the government or any financial institution.
Today, bitcoins have gathered massive support from online users as a substitute to well-known currencies such as US dollar, Euros and others. Bitcoins are created (known as mining) as an incentive to help solve difficult mathematical algorithms, and ensure the details of every online transaction can be verified and recorded.
How Does Bitcoin Work
If you want to buy or sell something using bitcoin, you need to start by obtaining a bitcoin wallet. This will store your bitcoins, and send or even receive bitcoins from other people. Here you do not need any paper work or an ID to create a bitcoin wallet. You can get a popular bitcoin wallet such as “Armory”, “Bitcoin Wallet” or “Breadwallet” online or from a broker such as coinbase. I would advise you to get a bitcoin wallet that is stores on your PC or mobile device and stay away from cloud storage options. If the cloud based wallet stops for any reason then you bitcoins are gone. Once you open the wallet, you will be given a bitcoin address. The address is a series of letters and numbers, very similar to bank account numbers. You will also get a private key which is a series of letters and numbers as well. The private key will act as a password.
You can do three things with bitcoins. You can decide to invest your bitcoins (very risky as the Bitcoin value is extremely volatile), make a purchase or send bitcoins secretly to someone. Many merchants have agreed to transact using bitcoins. By using bitcoins instead of other currencies, you will be making that purchase anonymously.
If you decide to utilize your bitcoins as an investment, this is how it works. The price of bitcoins keeps fluctuating. From example, in 2013 the average price was $400 per bitcoin, but by the end of that year the price rose to $1000 per bitcoin. So if you had two bitcoins worth $800 at the beginning of 2013, and you decided to invest them. These 2 bitcoins would be worth $2000 (today the value is under $400 again). Majority of people invest bitcoins because its value fluctuates.
For you to send bitcoins to another person or pay for goods and services using bitcoins, three things are needed. You need your bitcoin address, your private key or password and the receiver’s address. All you do is connect to the internet, enter the required information and click send, it is that simple and the transactions are usually completed in a matter of a minute or two.
What is Block Chain?
A block chain is a common public ledger where the entire bitcoin networks depend on. In fact, this general ledger is known as the block chain. It is used to discover any transaction made between all addresses, at any given point on the network. When a new block of transactions is done, it is included to the block chain. This creates a long list of all the transactions that took place on the network. But the ledger needs to be trusted. This is to ensure that the block chain is intact and can never be tampered with.
When a transaction is made, the bitcoin miners handle the process. They need to take the information in the ledger that is the block chain, and put on a mathematical formula to it. This will turn it into something unique. This unique “hash” value is a structure of letters and numbers. This hash is then stored along with the block, at the end of the block chain at every point in time.
All the transactions that are confirmed are included in the block chain. This also helps all bitcoin wallets to calculate their own balances. The wallets also keep a secret data known as seed or private key. The private key is used to sign transactions and provide a mathematical proof that the bitcoins have come from the owner of the wallet. It also prevents the transaction to be altered by anyone once done. All the transactions are broadcasted between users and can be confirmed by the network after 10 minutes.
Bitcoin mining is the procedure of adding transaction records to block chain. The block chain assists to confirm transactions to the network that it has taken place.
With normal money, a government decides when is the right time to print and distribute cash to the public. But bitcoin does not have a central government. Bitcoin miners use software to resolve mathematical problems and then they are issued a certain number of bitcoins in exchange. This is a good way to issue bitcoin and also creates a motivation for more people to mine. Bitcoin miners help to keep the Bitcoin network safe and secure by approving all the transaction. Mining is a very important and integral part of Bitcoin transactions. It also ensures fairness while keeping the Bitcoin network stable, secure and safe.
Bitcoin mining is designed to be very difficult. This is to make sure the numbers of the blocks found every day by miners remains stable. The main purpose of mining is to let Bitcoin nodes to have a secure, alter- resistant agreement. Mining is also the way that new currency (bitcoin) is introduced into the money supply. Bitcoin mining is designed similarly to actual mining to model the rate at which valuable metals, such as gold and copper, which are mined from the ground.
Another great thing about bitcoin is that the value in the future has a very good chance of being strong because there is a limited supply of bitcoins. The designer of the bitcoin created it in such a way that after approximately the year 2140 there will be no more bitcoins mined ever. This means the currency has a finite supply unlike the current monetary supplies around the world. This should give the value of bitcoin great stability in the future as no government can mess with it and devalue it. This de-valuing of currency is happening all over the world at the moment, for eg. in the USA where they just print more money when they need it which de-values the currency.
All in all, bitcoin has some flaws but it is a revolution in the way we know and deal with money. All it needs is some stability in the marketplace along with a wider acceptance and it will be a currency to be reckoned with.