What is Bitcoin? How does it work.


Every country has its own currency. India has Rupees, UAE has Dirham, Estonia and the Eurozone have the Euro, Russia has the Rouble and the USA have US Dollars. We exchange money in banks or specialized foreign exchanges, transfer it worldwide and invest it. In our times of technological innovation it is safe to say that most, if not all money transfers are conducted through the Internet. 


Is it then such a great surprise that an online currency such as Bitcoin has emerged? Interest in the currency has grown towards the end of 2013 due to significant spikes in the currency’s value, but let’s start from the beginning. In 2009, an unknown programmer by the name of Satoshi Nakamoto put forward a whitepaper that proposed a creation of new form of digital currency – cryptocurrency. Satoshi Nakamoto, a secretive internet user, invented bitcoin (digital currency) in 2008 before it went online in 2009. Many attempts to identify Satoshi have been made without conclusive proof
Cryptocurrency functions the same way as regular currencies do in that its used as a means of exchange, unit of account and a store of value. Cryptocurrency, just like other resources, has some demand for it, and subsequently a market price. The significant difference is Bitcoin’s intangibility – there is no bank-issued notes or papers – meaning that rather being used in hand-to-hand transactions, Bitcoins are stored and exchanged digitally within a decentralized, peer-to-peer network. Simply bitcoin uses decentralised technology for secure payments and storing money that doesn't require banks or people's names.

How does it work?
With traditional money, transferring funds from one account to another requires some intermediary authority or middleman. Even with hand-to-hand cash transactions, the issue, value and fiscal policy of money is controlled by a trusted centralized authority (such as a bank, agency or government). Bitcoin operates differently in that no middleman is required in transactions as the trust between actors is derived from computer science and cryptology, rather than trust in a central establishment. It also means that Bitcoin is transferred directly from the sender to the receiver, with absolutely no intermediaries.  

Bitcoin works on a public ledger called blockchain, which holds a decentralised record of all transactions that is updated and held by all users of the network.

To create bitcoins, users must generate blocks on the network. Each block is created cryptographically by harnessing users' computer power and is then added to the blockchain, letting users earn by keeping the network running.

A limit for how many bitcoins can be created is built into the system so the value can't be diluted. The maximum amount is just under 21 million bitcoin. 
A key point to note is that because of this lack of central issuing body, cryptocurrency is created and transferred with the help of a process called “mining”. This process requires an extremely powerful computer to crunch down the billions of calculations required to solve cryptological functions.

In reality, the mining process is extremely complex and technical. Despite its complexity, the process is transparent and open for review due to the open-source nature of Bitcoin. 
BITCOIN MINING
Unlike traditional currencies, crypto coins are not produced by a central authority like a bank or a consortium. It is a mathematical formula. These coins are produced by massively souped-up computers, called 'mining rigs', that solve complex math problems to obtain these virtual currencies. A ledger records all the transactions. 



A typical crypto currency mining rig runs round-the-clock, its performance depending on the high-end graphic cards and cooling systems used. Several online vendors as well as individuals are investing in these machines to mine crypto currencies. 

Cloud Mining
To set up a mining rigs a nominal amount to be invested, not everyone can opt for this. Some companies — Hashflare, Genesis and Bitconnect among them — have even set up so-called farms to collectively mine crypto currencies for individuals unable to assemble their own machines, for a fee.


Individuals can now spend as low as $2 to start with for mining, and these companies assure fixed returns every month.

WHAT ARE THE STRENGTHS AND WEAKNESSES OF BITCOIN?

Bitcoin is the first decentralized and uncontrolled currency. Since no central body owns the process for issuing new units, new coins are created at a fixed, predetermined rate. Unlike many government-issued currencies, this means that Bitcoin is immune from inflation, and is in fact a deflationary currency. Bitcoin also has the un unique property of “transparent anonymity”- meaning that despite all transactions and wallets being public through the Blockchain, all actors in a transaction are only identified by their bitcoin wallet address. Thousands of addresses are generated daily – this means that the user stays anonymous until they register both their personal details and their bitcoin wallet address somewhere (for example on a Bitcoin exchange). Bitcoin’s unique makeup also creates other strengths from the users perspective- the digital nature of Bitcoin makes it highly divisible and the lack of a central authority ensures that transaction fees are near-zero.

Bitcoin’s digital nature and lack of central body also shape Bitcoin’s weaknesses - lost Bitcoins are non-recoverable (meaning that if you lose your private key or the hard drive with your wallet gets corrupted or if you lose your bitcoin wallet seed, those Bitcoins are lost forever!). Take the case of a British man, who in 2009, threw away the hard drive that contained his 7500 Bitcoins. At the end of 2013, the value of Bitcoin was nearing $1200, meaning there was a hard drive at a dump with over 8.25 million USD stored on it! Stories like this are not uncommon as early miners have been known to mine thousands of new coins, which would have made for a small fortune even with todays weak Bitcoin exchange rate.

SO THEN, WHAT IS BITCOIN?


Bitcoin is a peer-to-peer payment system. Its unique properties attract many followers and opponents.

It’s impossible to tell whether Bitcoin will establish itself as the sole payment system for the internet, but for right now – there is significant interest and demand for it. The Bitcoin economy is still in its infancy and there are already many investors and people who are attracted by the prospects this new disrupting technology may bring.

The future of Bitcoin is unclear at the moment due to legal uncertainty (governments cannot issue it, but they can prohibit use), unstable exchange rates and subsequent lack of widespread (albeit rapidly growing) adoption. However, people familiar with Bitcoin and technology often note the similarities between Bitcoin’s ascendance and the rise of Internet in the 1990-2000s. When the Internet first emerged in the early 90s many experts underestimated the impact it would have on the world. It is often predicted Bitcoin will follow the same pattern. Until then, current users are embracing this truly innovative idea and are contributing to establishing a global bitcoin economy. 

 Also Read : Guide to Bitcoin : Know about the digital currency, in 10 minutes or less
 
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