Bitcoin is different from anything we have seen before. It is revolutionizing the present day concept of currency and transfer. It is an innovative approach for fast, cost effective international money transfer, and is making waves across the globe. Bitcoin was pioneered by Satoshi Nakamoto in 2009. He crafted a system of value based online transfer that supports and assures a potentially innovative online currency.
First let us try to understand what Bitcoin is.
Bitcoin is crypto currency emerging as a popular mode of exchange. These are not printed, like dollars, Euros or rupees. These are generated by people, mostly businesspersons running computing devices all across the globe. The core of Bitcoin’s operation is a global public log called blockchain. The blockchain system records all transactions between Bitcoin clients. In other words, Bitcoin is consensus network that allows for a payment system as an entirely digital currency.
As a straightforward explanation, Bitcoin is akin to cash on the internet. You can convert Bitcoins to cash using any of the several exchange websites.
It is decentralized peer-to-peer payment platform powered entirely by its users with no central sanction or even middlemen. Since Bitcoins are created digitally by a community of people, anyone is free to join its system.
This freedom is one the reasons why Bitcoins have become controversial.
- A few years ago criminals leveraged Bitcoins by buying them in batches of millions of dollars so that they can conceal it from the law.
- The result – the value of Bitcoins not only skyrocketed but also took the power of generating currency away from the central banks.
- Since Bitcoin accounts cannot be frozen by law, it is beyond the control of the police and financial institutions.
How are Bitcoin transactions performed?
Bitcoins are entirely virtual currency with absolutely no need for banks to store money. If you own Bitcoins, it is analogous to having gold coins. It has value enabling you to trade in goods or services online. If you prefer, you can even invest in them with the hope that its value will increase with time. As an analogy, it is like making a trade from “one wallet to another”. You can say Bitcoins are wallets that you store on your PC or smartphone or in the cloud.
If Bitcoins are not printed how are they created?
The creation of Bitcoins is called “mining”. This is done by using computing power in a distributed network. Computers across the globe “mine” for coins by competing with each other.
“Mining” of Bitcoins
Bitcoin mining is the course of action by which transactions are established or verified and added to the ledger. This ledger is called the block chain, and also the source into which new Bitcoin are released.
As mentioned earlier, anyone having a computing device and access to the internet can participate in Bitcoin mining.
The mining process involves essentially two steps.
- Compiling recent transactions into blocks
- Solving a mathematically difficult puzzle
Let us try to understand this concept better.
What Bitcoin miners actually do is competitive bookkeeping. They create and maintain a huge ledger that contains information of every transaction done earlier. When anyone wants to perform a transaction, the transfer has to be verified and validated by miners.
Here is how they do it.
- Check the ledger to make certain the sender is not sending Bitcoin they do not have
- If the transfer is valid, the miners add it to the ledger
- To safeguard the ledger from getting hacked, the miners seal it by several layers of computational work, making it virtually impossible for fraudsters to complete.
- For performing this service, the miners are rewarded Bitcoins.
Now is the question of validity of the transaction. How do you ensure a party has not done double spending?
Such risk in currency is avoided because the currency notes are hard to counterfeit, and we have trusted third parties like banks and credit card providers. They process transactions in a secure manner and update account balances regularly. But Bitcoins are digital, and there is no third party overseeing its transactions.
So how do you ensure the validity of the Bitcoin transactions?
The answer lies in the public ledger that has the historical record of all transactions. If all the Bitcoins can be traced back or reconciled to when they were transacted, then the owner can be trusted with the transactions as also the quantity of Bitcoins he or she owns. One more thing we must keep in mind is that there is no such thing as Bitcoin account. All users are anonymous. It is for this reason Bitcoin is often called pseudonymous.
But in this digital world hiding an identity can be tricky. However, there are methods to make Bitcoins as anonymous as possible.
Remember, Bitcoins operates as currency and mining can be performed as business. A significant number of miners are doing it for profit. The process can be challenging because Bitcoin value fluctuates and investments in mining can be high.
Know about the risks of investing in Bitcoins.
If your goal is to mine for profit, make certain that you do your homework right.