Only a few have been able to create an environment that Bitcoin has. It rose to power within a short span of time and have made (almost) everyone discussing it.
Tech forums around the globe are debating its importance, and many already adopted it as a payment method.
Although the existence of this virtual currency dates back to around ten years, it remained unknown for majority until last year or so. Trading at bitcoin exchange is quite normal now, and many ATMs are opening up to get you buy these cryptocurrencies with cash.
But what is this Bitcoin all about and how does it work. Worry no more, I am going to start with the basics.
Who invented Bitcoin?
Yes, it is an invention, a currency that exists only as codes. (Yes all those shiny Bitcoin pictures is a lie). It is a form of digital money that is created and transacted using encryption, i.e., using cryptography. And the credit for this concept goes to Satoshi Nakamoto.
It is a pseudonym used by the developer(s) of Bitcoin who wanted to create a payment system where there is no central authority to control your money and any transaction involved. It is a peer to peer system, but no one needs to reveal their identity and yet have the trust that they are safe.
And the person behind has been quite successful. The proposal for bitcoin and its blockchain system came somewhere towards the end of 2008, and no one knows his/her identity to date.
Yes, this blockchain, what is it all about?
The power of this digital currency lies with the blockchain, a big decentralized ledger that records all the transactions. This ledger lives on the users’ machines and not on a server. When an operation takes place, it is broadcasted to all the peers on the network.
The transaction happens, and everyone knows about it, but it’s not added to the database until confirmation.
A miner is the one who confirms it. When transactions take place, everyone in the network tries to verify that it’s legitimate. For this, they need to solve a cryptographic puzzle based on the Proof of Work protocol.
The one who can solve the puzzle adds the block of pending transactions to the blockchain, to the distributed ledger.
The validated transactions are now available for everyone to see. And for their work, the system rewards the miners with (new) Bitcoins. Thus, this crypto-solving process is also called Bitcoin mining.
Because of this transparency, people find the use of the Blockchain technique in various fields where the information has to pass through many stages. Many other cryptocurrencies (the altcoins) borrowed this blockchain method to develop themselves. FYI, any other cryptocurrency is it Litecoin or Ethereum, are all altcoins.
How does Bitcoin have value?
Bitcoins do not have any regulating authority, and it is not backed by any commodity. Bitcoins have value because people think it should.
Its price keeps swinging up and down, determined by the trading in the Bitcoin exchanges worldwide. The process is same as what happens during company shares and gold trading.
In the current system, the total number of BTC in supply can only be about 21 million, and the current market supply is approaching 17 million. Miners are creating new Bitcoins every minute (or hour), and according to the calculations, the last Bitcoin will be mined sometime in 2040.
It’s all about demand and supply. If they are in demand by 2040, the Bitcoin price will touch sky-high because of a shortage in supply. But that won’t be the case if something else takes its place or the system can enable mining more coins.
As of now, the cost of 1 BTC is revolving around USD 10,000 which was at USD 1,000 a year back. The currency did almost reach USD 20,000 before falling to current levels.
Go trading with Bitcoin!
Bitcoin sounds interesting? Do you want to buy some? Wait, a whopping ten thousand for a single BTC! It’s too high. But the thing with Bitcoin is that you can also buy them in fractions. Well, that holds true for USD too, but in USD the smallest amount is 0.01. And in the Bitcoin system, the lowest tradable amount is 0.00000001.
Amazing, isn’t it? This value, 0.00000001 BTC, is called Satoshi. And you definitely can buy a Satoshi, at only USD 0.0001. Too much of math? Well, you can buy Bitcoins worth USD 100 or even USD 1. The number of Bitcoins you own will be low but valid and can be traded.
But before you start buying, you need to get something which is called Bitcoin wallet. It is a digital wallet to hold your treasure. These are available in different formats such as PC software, mobile software or as a web version.
One interesting thing with the Bitcoin wallets or those of any altcoins is that they don’t hold any amount. All they have is a key, a private key which you can use to spend your coins, to ‘sign’ your transactions. You also have a public key to receive Bitcoin.
When you initiate a transaction, peers check your previous transactions in the blockchain to see if you own that much amount. Blockchain stores the transactions and does not keep any account details. So, you can also use a hardware wallet to save that key or a paper wallet with QR codes.
Now that you have your wallet, you can get your coins at one of those Bitcoin exchanges. But do read some of the major problems with Bitcoin before you start considering it as currency.
Disadvantages of Blockchain
One of the significant problems with Bitcoin is adaptability. It is not for everyone, yet. It’s no doubt that the system is a complex one.
You need to be a sort of geek, if not an actual one. Also, the speed of transactions is a hindrance to daily life usage. Imagine yourself in the line at a supermarket cash counter, waiting for them to confirm that the payment is successful.
Although the processing time is a minimum of ten minutes, this goes up to an hour as transaction volume increases.
Moreover, there is no central authority to take help from in times of need. You made a wrong transaction, you have lost the amount.
And that would be all about Bitcoin for now. Be cautious about the ride.