If you have heard about bitcoins but do not really understand them then this blog is for you. Bitcoin, developed in 2009, is the most popular cryptocurrency. The novel currency was developed by someone or a group of people under the pseudo name Satoshi Nakamoto. Bitcoin is, in fact, one of the first digital currencies to use the peer-to-peer technology. Investing in bitcoins seems to be lucrative for many. We have penned this blog to help you understand what is bitcoin and how does it work?
What is bitcoin?
Bitcoin is a secure digital decentralized currency. They can be used to procure goods and services online. Bitcoins are transferred from person to person independent of middlemen like banks. They can make transactions across international borders faster and easier. Also, online transactions using bitcoins do not attract transaction charges like credit cards do. However, most businesses do not accept cryptocurrencies and some countries have banned them all together. At present bitcoins are popular for investment purposes mainly. People are investing in bitcoins and other cryptocurrencies, hoping to make money out of it. The price of bitcoins has been fluctuating ever since 2009. In the year 2017 bitcoin’s value had skyrocketed.
Bitcoin vs. traditional currency
Bitcoin is a digital decentralized currency. This means bitcoins do not have any physical form and are not regulated by any central agency. On the other hand, traditional currencies are regulated by a central body. A bitcoin represents itself and its value is determined by how much someone is willing to pay for it. There are 21 million bitcoins in total. As compared to traditional currencies, bitcoins cannot be minted endlessly. Thus, by capping it at 21 million coins bitcoins are protected from inflation and deflation.
How does bitcoin work?
Bitcoins work based on the decentralized ledger or the blockchain technology. The decentralized ledger is a public transaction database. The decentralized ledger is the core of cryptocurrency. The blockchain is made of “blocks” of encrypted data which are stored chronologically in the public database called “chain”. The block contains information about the bitcoin transactions and each block is identified with a unique code called the “hash”. Whenever a new transaction occurs, a record of the new transaction gets updated on every participant’s computer. The blockchain is accessible to everyone and being decentralized means it is not controlled by any central agency. Since, every transaction is recorded publicly which makes it impossible to fraud Bitcoins, make fake ones or spend ones you don't own. Although a public transaction database is used, each individual transaction is secured by cryptography.
Is bitcoin secure?
Bitcoin transactions are secured using blockchain technology and cryptography. For the transaction block to be added to the blockchain it must be verified by the nodes/computers in the network. The transactions are irreversible, public and usually cannot be hacked. It is, in fact, far more secure than other forms of digital transactions. There are some possible ways of losing your bitcoins forever though. In case you lose your bitcoin wallet, lose your private key or the website storing your bitcoins gets hacked. Thus, securing your own bitcoins is crucial. Bitcoin transactions are also anonymous. Even though bitcoin transactions are recorded in a public database, the names of the buyers and sellers are never divulged. Thus, transactions involving illegal purchases cannot be traced and the buyers/sellers cannot be identified.
How to get bitcoins?
You need to exchange traditional currencies to buy bitcoins. Bitcoin exchange is the marketplace to sell or buy bitcoins in exchange of traditional currencies.
Bitcoin wallet
Bitcoins are stored in “digital bitcoin wallets”, something like a virtual bank account. These bitcoin wallets exist either offline or online in the cloud or on a computer. People can send/receive bitcoins using the bitcoin wallet, just like digital transactions are done. This virtual bank account can be used to pay bitcoins for goods or services also store them for the future. There are problems with online bitcoin wallets. Servers of cloud wallets can be hacked or the companies might flee with the bitcoins. Viruses may destroy bitcoin wallets stored in computers. However, unlike real bank accounts bitcoin wallets are not backed by federal insurance.
Bitcoins and cryptocurrencies, on the whole, may revolutionize how we transact in the future. People would prefer it for its ease and speed of transactions. Also, its value is not determined by central regulatory bodies. Bitcoin transactions are no doubt secure and impossible to fraud. More than being a means of transaction bitcoins are popular for investment at the moment. The rise in the value of bitcoins recently has attracted investors all over the world. Investing in bitcoins is risky because of market volatility and the fact that is not regulated by the government. The value of bitcoin has been fluctuating sharply ever since it has been created. People are investing in bitcoins hoping to get high returns.