What is Bitcoin and how does it work

What is Bitcoin and how does it work?

Posted on Posted in Bitcoin, Blockchain, Cryptocurrency, Cryptocurrency News, What's Trending Now

 

Bitcoin has existed for several years now and many people have questions about them. Where do they come from? Are they legal? Where can you get them? Here are the basics you need to know.

 

Cryptocurrency Defined
Cryptocurrencies are just lines of computer code that hold monetary value. Those lines of code are created by electricity and high-performance computers. Cryptocurrency is also known as digital currency. Either way, it is a form of digital public money that is created by painstaking mathematical computations and policed by millions of computer users called “miners”. Physically, there is nothing to hold.
 
“Crypto” comes from the word cryptography, the security process used to protect transactions that send the lines of code out for purchases. Cryptography also controls the creation of new “coins”, the term used to describe specific amounts of code.
 
Governments have no control over the creation of cryptocurrencies, which is what initially made them so popular. Most cryptocurrencies begin with a market cap in mind, which means that their production will decrease over time, thus, ideally, making any particular coin more valuable in the future.

 

 

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What Are Bitcoins?
Bitcoin was the first cryptocoin currency ever invented. No one knows exactly who created it — cryptocurrencies are designed for maximum anonymity — but bitcoins first appeared in 2009 from a developer supposedly named Satoshi Nakamoto. Nakamoto outlined what Bitcoin is in the original 2009 Bitcoin whitepaper — a document which created the roadmap for Bitcoin. He has since disappeared and left behind a Bitcoin fortune.
 
Because Bitcoin was the first cryptocurrency to exist, all digital currencies created since then are called Altcoins, or alternative coins. Litecoin, Peercoin, Feathercoin, Ethereum and hundreds of other coins are all Altcoins because they are not Bitcoin.
 
One of the advantages of Bitcoin is that it can be stored offline on a person’s local hardware. That process is called cold storage and it protects the currency from being taken by others. When the currency is stored on the internet somewhere (hot storage), there is high risk of it being stolen.
 
On the flip side, if a person loses access to the hardware that contains the bitcoins, the currency is simply gone forever. It’s estimated that as much as $30 billion in bitcoins have been lost or misplaced by miners and investors. Nonetheless, Bitcoins remain incredibly popular and is considered as the most famous cryptocurrency of all time.

 

Why Are Bitcoins So Controversial?
Various reasons have converged to make Bitcoin currency a real media sensation. From 2011-2013, criminal traders made bitcoins famous by buying them in batches of millions of dollars so they could move money outside of the eyes of law enforcement. Subsequently, the value of bitcoins skyrocketed. Scams, too, are very real in the cryptocurrency world. Naive and savvy investors alike can lose hundreds or thousands of dollars to scams.
 
Ultimately, though, bitcoins and altcoins are highly controversial because they take the power of making money away from central federal banks, and give it to the general public. Bitcoin accounts cannot be frozen or examined by tax men, and middleman banks are completely unnecessary for bitcoins to move. Law enforcement and bankers see bitcoins as “gold nuggets in the wild, wild west”, beyond the control of traditional police and financial institutions.

 

How Bitcoins Work
Bitcoins are completely virtual coins designed to be “self-contained” for their value, with no need for banks to move and store the money. Once you own bitcoins, they behave like physical gold coins: they possess value and trade just as if they were nuggets of gold in your pocket. You can use your bitcoins to purchase goods and services online, or you can tuck them away and hope that their value increases over the years.
 
Bitcoins are traded from one personal “wallet” to another. A wallet is a small personal database that you store on your computer drive (i.e cold storage), on your smartphone, on your tablet, or somewhere in the cloud (hot storage).
 
All Bitcoin transactions are recorded permanently on a distributed ledger called the “blockchain” — this ledger is shared between all full Bitcoin “miners” and “nodes” around the world, and is publicly-viewable. These miners and nodes verify transactions and keep the network secure. For the electricity they use to do this, miners are rewarded with new bitcoins with each 10-minute block (the reward is currently 12.5 BTC per block).
 
The Bitcoin protocol is also hard-limited to 21 million bitcoins, meaning that no more than that can ever be created. This means that no central bank, individual or government can come along and simply “print” more bitcoins when it suits them. In this sense, Bitcoin is a deflationary currency, and as such is likely to grow in value based on this property alone.
 
For all intents, bitcoins are forgery-resistant. It is so computationally-intensive to create a bitcoin, it isn’t financially worth it for counterfeiters to manipulate the system.
 
Bitcoin is still a cutting-edge experiment in technology and economics, and like the worldwide web in 1995, its myriad potential, purposes and applications are yet to be decided. Is it just electronic money? A foundation for smart contracts and electronic shares? Is it underground and subversive, challenging the power of governments, or will it integrate into mainstream finance and go unnoticed? If you know the answers to any of these questions, or if you can figure out how to capitalize on them, there may be many lucrative opportunities for you in the Bitcoin space.

 
 
 
 

 

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