Quickfacts: What is bitcoin?

What exactly is bitcoin?

 

Bitcoin was created by a developer named Satoshi Nakamoto in 2009.

Simply like other payment systems, for an end user, Bitcoin is an online payment system which uses a digital money named Bitcoin. Also, just like other systems it can be stored in wallets.

However it is different than the other currencies like Dollar, euro, rupee etc. as mentioned below-

It is a currency based on cryptography. Cryptography is used to secure the transactions and to control the creation of new coins.

 

Unlike dollar, euro etc. which are owned and controlled by the central banks of respective countries/continents, it is not owned by any single entity and hence is often called a decentralized digital money. Because of this, the transaction in this network are peer to peer, and no other entity/central authority/middleman is involved in it, so it is said that it saves the transaction costs from the perspective of the end users comparatively.

These third parties like anks, govts. act as creating and controlling agencies for their respective currencies in the real world. In case of bitcoin there is no 'third party', only the users transacting.

For end user, bitcoin is nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive bitcoins with them.  Bitcoin is as virtual as the credit cards and online banking networks people use every day.

It is important to know how it works, managed and how can it be earned. Read on..

How does it work?

 

As mentioned earlier it is a payment system. The system is a peer to peer network on which user who is transacting sends bitcoin by broadcasting digitally signed messages using the bitcoin wallet software.

In the background, all these transactions are stored in a public decentralized ledger called ‘Blockchain’. So, the entire system doesn’t have a central repository or a single administrator.

Steps of transaction and its creation

 

In short, it is created and controlled by bitcoin software. If you want to understand this completely understanding a few terms is important.

Nodes are parts of the bitcoin network (bitcoin mining hardware) running the bitcoin core software. They receive the transaction broadcast from the clients and validate the transactions. Then they add them to their copy of transactions and broadcast this entry or block (ledger additions) to other nodes. 

So each node has a copy of the distributed database, called blockchain.

A block is a new group of accepted and validated transactions to be added to the blockchain is called block.

Creation of bitcoin: Mining

 

Mining is the record keeping service of the network. It keeps the blockchain consistent, complete and unalterable. 

Basically it is done by the bitcoin software installed on the computer resources provided by the interested people (called miners) which has specific hardware requirements. Every miner, as a reward, earns newly created bitcoins plus the transaction fee (again some bitcoins) when adding a new block. 

The reward for adding a block is halved every 210,000 blocks (every four years). By this calculation, the reward will become zero when bitcoins reach the no. of 21 million. This will be reached in the year 2140.

All the bitcoins in the system are created only in this manner (as a reward).

Storing and using bitcoins

 

From an end user’s perspective, payments are done using wallets from desktop or mobile applications and simply entering the recipient’s address and pressing ‘Send’.

Bitcoins are ‘stored’ in a bitcoin wallet owned by the user. Essentially it contains the private keys which help the system to proof of one’s ownership of a particular no. of bitcoins. So these keys are the only proof of ownership of bitcoins and is somehow this data is lost, the bitcoins are gone too.

Privacy 

 

Transactions using bitcoins can always be verified from the records but can only be identified between two bitcoin addresses. The owners of the addresses are not known thus making the end clients anonymouse. Some govts. fear that this could lead to criminal activities.

How to get bitcoins?

 

Four ways-

It could be purchased at a Bitcoin exchange.

It can be exchanged with someone.

It can be earned through competitive mining.

It can also be received as a payment for goods or services.

As an investment

 

Many economists are vary of investing in bitcoins. However some people buy bitcoins as a way of diversifying their investments. 

The fact that its supply is limited and an increasing no. of merchants and countries allowing transactions in bitcoins makes this investment more lucrative for them. Many people and organisations have invested in bitcoins. It is believed it is still undervalued hence a good reason to invest in it.

Some people make money by mining. As far as the hardware used for mining is concerned, it has developed a lot and mining consumes a lot of energy. Wikipedia says that “As of 2015, a miner who is not using purpose-built hardware is unlikely to earn enough to cover the cost of the electricity used in their efforts, even if they are a member of a pool” Also, with the time passing the earning form each mining would decrease. So it would require a good amount of money now to even become a miner.

Advantages

 

Safe and secure, user identities not tied to the transactions hence making it identity theft free.

Not under control of any authority and accessible to all.

Secure system.

Can be sent anywhere in the world anytime without thinking about holidays.

Disadvantages

 

Still developing.

Not accepted everywhere.

Can give rise to illegal activities.

Acceptability

 

It is gaining acceptability worldwide with organisations like PayPal, Microsoft, Dell, Expedia etc are now accepting payment with bitcoins and list contains 100 plus merchants. Millions of transactions are taking place using bitcoins today and this no. is only increasing.