What is Bitcoin
Thinking what is Bitcoin? Bitcoin is a virtual, digital currency often called as cryptocurrency that is completely decentralized. Which means it is not controlled by anybody nor issued by any bank or government, instead it is an open network which is managed by its users. By analogy, it is similar to send a gold coin via email.
Bitcoins can be used to buy things electronically just like other conventional currencies like rupees, dollars, euros etc. This digital money (created and held electronically) is an improvement on existing payment methods and used for secure and instant transfer of value anywhere in the world.
As a new user, you can get started with Bitcoin without even getting deeper into the technical details. Once you install a Bitcoin wallet on your computer or mobile, it will automatically generate your first bitcoin address (you can create more whenever you need). You can disclose your addresses to your friends for making digital transactions.
Just like any other currency is based on gold or silver, bitcoins are based on mathematics. Around the world, people are using software programs that follow a mathematical formula to produce bitcoins. This mathematical formula is freely available, available for anyone to check it. The software is also open source, which means that anyone can look at it to make sure that it does what it is supposed to.
Also, unlike government issued money, that can be inflated at will, the supply of bitcoin is mathematically limited to twenty one million bitcoins, that can never be changed. Bitcoins are impossible to counterfeit or inflate. You can use them for sending or receiving money, with anyone, anywhere in the world – at minimal costs. Once a bitcoin is sent from one address to the other, you can not get it back unless the recipient sends it back to you. Therefore, transactions are made without any middlemen so there are no transaction fees and no need to give your real identity or name to anyone while transacting.
The system is peer-to-peer, that is, users can transact directly without an intermediary like a bank, a credit card company or any other similar thing. They are not printed like other currencies, rather they are produced by people and businesses, by running computers all around the world using softwares that solves mathematical problems.
More businesses around the world have already begun accepting bitcoins and now you can buy your favorite pizza or go out to salon and pay for the services using Bitcoin. However, some merchants also do not accept bitcoins directly. No worries! You can get your earned bitcoins exchanged for real money in that case and pay as you wish.
Who created Bitcoin?
A software developer called Satoshi Nakamoto proposed bitcoin, as an electronic payment system based on mathematical proof. The main idea behind this being – producing a currency that is independent of any central authority, transferable electronically and instantly, with a very low transaction fees.
The first bitcoin specification and proof of concept was published in 2009 by an unknown individual under the pseudonym Satoshi Nakamoto who revealed little about himself and left the project in late 2010. The bitcoin community has since grown exponentially. You must read more about Who Created Bitcoin here.
How does Bitcoin work?
Bitcoin enables people to make digital transactions, sending and receiving bitcoins using a personal electronic Bitcoin wallet that you can store on your computer, smartphone or anywhere in the cloud. Basically bitcoins are traded from one personal wallet to another. Once you own a bitcoin, they possess value and trade just like gold coins. However, they are completely virtual coins and no banks move and store them.
All the information of every single digital transactions is stored and recorded in Bitcoin’s own general ledger called the Blockchain. This ledger contains every bitcoin transaction that ever processed enabling a user to verify the validity of each transaction. Validity of each transaction is protected by some digital signatures – corresponding to the sending addresses, allowing the users to have full control over sending bitcoins; basically leaving no chances of misleading activities such as fraud, identity theft chargebacks, etc.
What is Bitcoin Technology?
Once you install a Bitcoin wallet on your computer or mobile, it will generate your first bitcoin address and you can create more whenever you need one.
Now, Bitcoin works on Blockchain technology. Blockchain is the shared public ledger on which the entire decentralized distributed peer-to-peer Bitcoin network relies. All confirmed transactions are included in the blockchain so that the bitcoin wallet can calculate the spendable balance and new transactions can be verified.A transaction is a transfer of value between bitcoin addresses that get included used to digitally sign transactions to provide a mathematical proof that they are valid.
Bitcoin wallet has a secret piece of data called “the private key” or “seed” – used to sign transactions to provide mathematical proof that they came from the owner of the wallet. A digital signature prevents the transaction from being altered by anyone once it has been signed. All transactions get broadcasted between users and generally begin to be validated and confirmed by the Bitcoin network, within a few minutes or mostly within an hour.
How Bitcoin Transactions Work?
A transaction is a transfer of value between Bitcoin wallets that gets included in the Block chain. Bitcoin wallets have a secret piece of data called “private key” or “seed”, that is used to sign transactions providing mathematical proof that they have come from the owner of the wallet. The signature also prevents the transactions from being altered by anybody once it has been issued. All transactions get broadcasted between users and usually get confirmed by the network in the following 10 minutes, through a process called mining.
What is Bitcoin based on?
Conventional currency has been based on gold or silver. Theoretically, you know that if you hand over rupees at the bank, you can get some gold back(although this don’t actually work in practice). But Bitcoin is not based on gold, rather it’s based on mathematics. All around the globe, people use software programs, following a mathematical formula for producing bitcoins. The mathematical formula is freely available, so that anyone can check it. The software is often open source, meaning that anyone can look at it to make sure that it does what it is supposed to.
What is Blockchain?
Blockchain is knows as a public ledger of all the bitcoin transactions whereby all the transactions take place. Primarily, there are no physical Bitcoins, but only balances associated with public and private keys. Transactions are verified by network nodes and the balances are kept on this public ledger called Blockchain along with all Bitcoin transactions that is verified by a massive amount of computing power.
Bitcoins are mined, using computing power (solving mathematical puzzles and showing proof of work) in a distributed network. Blockchain keeps on growing with new completed blocks getting added to it once anybody solves a mathematical puzzle. The blocks get added to the blockchain in a linear and chronological order. Blockchain records complete information about various user addresses and their balances. Basically, we can say that blockchain is the proof of all the transactions happening around in the bitcoin network and we can easily fetch information upon any transaction happening into any address at any point in the past.
So, if you have publically used bitcoin address, anyone can tell how many bitcoins are stored in that address (without knowing that it’s yours). Therefore it is advisable not to use the same bitcoin address consistently and not transferring lots of bitcoins to a single address. On an average, every 10 minutes a new block is added to the blockchain through mining.
Who controls the Bitcoin Network?
Nobody owns the Bitcoin Network much like no one owns the technology behind email or the Internet. Bitcoin transactions are verified by Bitcoin miners which has an entire industry and Bitcoin cloud mining options.All users are free to choose what software version they use. In order to stay competitive with each other, all users need to use software complying with the same rules. Bitcoin can only work correctly with a complete consensus among all users. Therefore, users and developers have a strong benefit to protect this consensus.
Who print Bitcoins?
Practically no one. This digital currency is not physically printed in the shadows by a central bank, unaccountable to the population and makes its own rules. This is created digitally, by a community of people that anyone can join. Bitcoins, mined using computing power in a distributed network. This network, in turn processes transactions made with its virtual currency, effectively making bitcoin its own payment network.
What is Bitcoin Mining?
People compete to mine bitcoin to solve complex math puzzles. This is how bitcoins are created. Currently, a winner is rewarded with 12.5 bitcoins roughly every 10 minutes. Mining, being a distributed consensus system is used to confirm waiting transactions by including them in the block chain. It enforces a chronological order in the blockchain, protects the neutrality of the network and allows different computers to agree on the state of the system. For confirmation, transactions must be packed in a block that fits strict cryptographic rules that will be verified by the network.
These rules prevent previous blocks from being modified because doing so would invalidate all following blocks. Mining creates the equivalent of a competitive lottery, preventing any individual from adding new blocks consecutively in the block chain. This way, no individuals can control what is included in the blockchain or replace parts of the blockchain to roll back in their own spends.
How Bitcoin is different from other currencies?
Inspite of being able to make any payment for your needs electronically, bitcoin is completely different than any currency you’ve used before for e.g: unlike government issued money, that can be inflated at will, the supply of bitcoin is mathematically fixed and limited to twenty one million bitcoins that can never be exchanged. Hence, bitcoins are impossible to counterfeit or inflate.
You can use bitcoins for sending or receiving money, with anyone, anywhere in the world at free of cost. Few very important characteristics of Bitcoins that differentiates them from government stated regular currencies are stated below:
- It is decentralized: Bitcoin network is not controlled by any single authority. Every machine that mines bitcoin and processes transactions makes up a part of the network and the machines work together. This means that, no central authority can take away your owned bitcoin and this money keeps flowing
- It is easy to set up: Unlike conventional bank accounts and other merchant accounts , setting up a bitcoin address takes few seconds, no questions asked and no fees has to be paid.
- Its anonymous: As stated, users can hold multiple bitcoin addresses and they are not linked to names, addresses or other personally identifying information.
- Its transparent: Bitcoin stores details of each transaction that has ever happened in the network in its own general ledger called the blockchain, that can explain its entire clear picture.For ex: let’s say you have a publicly used bitcoin address, so anyone can tell how many bitcoins are stored at that address, however nobody knows that it’s yours.
(There are measures that people can take to make their activities more opaque on the bitcoin network, such as not using the same bitcoin addresses consistently and not transferring too much of bitcoins to a single address)
- Very less/no transaction fees: Unlike bank transfers, that involves certain charges in international payments etc. Bitcoin transactions does not include any transactional fees.
- Its fast: You can send money anywhere and it will appear within minutes in the wallet, as soon as the bitcoin network processes the payment.
- It’s non-repudiable: Once you send the bitcoins, there is no chance getting them back unless the recipient returns them to you.
Why use Bitcoins?
- Bitcoins can be used for digital payments for buying any merchandise anonymously.
- International payments becomes easy and cheap because bitcoins are not tied to any country or subject to regulation.
- There are no hidden costs/fees like credit card fees etc.
- You can buy bitcoins as an investment and get them exchanged for real money as well.
How to get bitcoins?
You can easily get bitcoins through various ways, I will just give you a brief introduction about it.
- Buy Bitcoins on Exchange: There are several marketplaces called bitcoin exchanges that allow people to buy or sell bitcoins using different currencies.
- Transfers: People can send bitcoins to each other using mobile apps/computers. This is similar to transferring money online.
Advantages of Bitcoin:
- Freedom of Payment: With Bitcoin it is possible to send and receive money anywhere in the world at any time. You just don’t have to worry about crossing borders, rescheduling for bank holidays or any other such limitations – one might think will occur when transferring money. Also, you always have control of your money with Bitcoin, provided the fact that there is no central authority figure in the Bitcoin network.
- Control and Security: Bitcoin transactions are completely safe, the users transacting them have complete control over it. Payments in bitcoin are and finalized without one’s personal information tied to the transactions. Due to the fact that personal information is kept hidden from everyone, bitcoin is secure against any identity theft. Moreover, merchants cannot charge extra fees on bitcoin payments. They have to notify consumer before adding any charges. In addition to this, Bitcoin can be backed up and encrypted to ensure the safety of your money.
- Transparency: With its public ledger blockchain, all finalized transactions are available for everyone to see, however personal information hidden which means everybody knows how much a particular bitcoin address has as amount but nobody knows whose address is that.Anyone at anytime can verify transactions in the Bitcoin blockchain. Moreover, Bitcoin protocol can not be manipulated by anybody, organisation or the government – making bitcoin cryptographically secure.
- Low/Minimal Fees: At present, either there is no fees or very low minimal charges with Bitcoin payments. Also, digital currency exchanges help merchants process transactions by converting bitcoins into normal currency. These services generally have very less fees when compared to credit cards and Paypal amount withdrawal.
- Less Risk for Merchants: Having the fact that Bitcoin transactions can not be reversed, do not carry with them any personal information and are highly secure – merchants are protected from potential losses that might occur from fraud. With Bitcoin, merchants are now able to do business where crime rates are high. This is because it is very hard to cheat or con anyone with Bitcoin due to its extremely secure public ledger Blockchain.
Disadvantages of Bitcoin:
- Lack of Awareness and Understanding: Major reason – many people are still unaware of this digital currency and its uses and since networking is a key to sppread the word on bitcoin, people need to be educated on this. Today, although businesses are accepting bitcoins because of its numerous advantages, still the list is relatively very less compared to physical currencies.
- Risk and Volatility: Bitcoins are highly volatile due to the fact that there is a there is no central authority controlling the value of a single bitcoin is one the biggest disadvantage.Due to lack of proper valuation system, Bitcoin can be subject to high volatility in price. This means the reverse can happen as well. This volatility could make an average person or trader uneasy while dealing with Bitcoins. However, it is expected that this volatility will decrease as time passes by. At present, scenario is that bitcoin price bounces everyday. However, as more businesses and trading centers begin accepting Bitcoins, it’s price will eventually settle down.
- Anonymity: Due to the anonymity of Bitcoin, users must be weary of illegal activity when conducting a transaction. While the blockchain itself is the cause for concern, you must maintain a healthy level of caution when trading with someone as transactions cannot be undone and you cannot necessarily track down the other person of something goes wrong such as not receiving an item you purchased.
- Scalability: The scalability of bitcoin is another issue for long-term users. As the infrastructure for this currency has not undergone any significant improvements, there is a risk that future adoption of more people could lead to a very congested and slow system.
I hope now, you have a clear picture of what is bitcoin and what are its potential advantages and disadvantages. People have now started taking interest in this. However, still there is a lot of room available for people to understand this digital currency better.