What is Bitcoin? Everything you should know about Bitcoins

All about cryptocurrency, from scratch

So here’s the big news coming up, Bitcoin hits a lifetime high of $4000 and it’s fluctuating around it. I am following Bitcoin for the past few months and what was predicted a few months back is coming true now.

This makes me very much excited to share insights and details of what Bitcoins actually are and how they work? I see a lot of queries and confusion on this buzz which made craft this post. In this post, we will see What is Bitcoin, the functioning of Bitcoin and a lot more fun stuff.

To understand What is Bitcoin, let us take the classic example of the Orthodox tradition of bank transfers. When you initiate a bank transfer what actually happens is the amount specified is credited in the system and not actually money being deposited in their account.

The physical money stays in the bank branch you’ve deposited but soon after the process of transfer, the amount is made available to the recipient’s account virtually. Basically, we trust banks with our money that doesn’t go where we want to. The current bank system is all about the physical money circulating as virtual money.

Now one peculiar thing that was happening so far was the “fee” structure that banks took as processing fees. If you make an international transaction on PayPal or Payoneer or any such third-party agents, you pay more than you intend to transfer and that extra is the fee that these services charge.

This is actually their source of income and maintenance charge of their services so you can not avoid it, but my point here is that for a transaction of mere $100 you would pay $108-$110 that includes a various form of fees. However, this is just a small amount of fees but image the huge chunk of fees charged on a transaction in six or seven figures, it’s huge, right?

Now Image a system that would eliminate these middlemen and directly bring you and your recipient face-to-face virtually and make the transaction happen. A system that is so transparent and secured that it would make the transaction happen under your supervision and trust, as well as make it faster without any fees. That would be magical, isn’t it?

A similar thought came to mind of Satoshi Nakamoto (Code name of a person who invented it) and he/she/they mailed a paper to a cryptographic mailing list and described the work and flow there. This happened in 2008, and in 2009 the system went live and open source. The system was named “Bitcoin”

What is Bitcoin?

Hackers of Game of Thrones’ upcoming season have demanded $7.5M in Bitcoins. I got to know two things from this,

  1. GOT fans’ curiosity is at stake and
  2. Bitcoin is super valuable today.

Wikipedia says “Bitcoin is a worldwide cryptocurrency and digital payment system invented by an unknown programmer, or a group of programmers, under the name Satoshi Nakamoto. It was released as open-source software in 2009”

In laymen language, Bitcoin is decentralized E-cash system that you can send across the globe to anyone without the intervention of any third party vendors, including banks. All you need to have is an internet connection, a mobile device or a computer as Bitcoin is a software. Imagine “Money.exe”

Bitcoin is beyond any country specific jurisdiction and hence the laws of fees structure of transfer wouldn’t vary and will be same through out the world. When compared to transfer rates of $8-$10, you can now transfer funds from the US to India or Europe at just $2-$3.

The structure of Bitcoin is so we architectured that you don’t need any middlemen for your money to safely go from one account to another. With this system in place transferring funds is like chatting on a messenger. Both sender and receiver remain anonymous including your transaction.

Where is Bitcoin stored?

Just like you store money in banks or wallets, Bitcoin has its own wallet system that accepts only Bitcoin as the currency. You buy Bitcoin buy spending your paper-currency, store it in Bitcoin wallets and spend it as per your need. Here’s a video explaining it well.

As a security part of Bitcoin, whenever you need to spend or receive Bitcoin in your Bitcoin wallet you can create a unique address for that particular transaction. You can have any number of these unique addresses. Bitcoin wallets are available on the mobile phone and for computers. You can download the Best Bitcoin wallet for IOS & Android

Once you have installed it, it will be generating a Bitcoin wallet address which can be used to receive Bitcoins from anywhere & from anyone in the world.

Bitcoin being directly linked to paper-currency it is important for us to know how does it work, both technically and economically.

How Bitcoin works?

The nature of Bitcoin is indeed a confusing system in terms of technology as it is over Internet and chances of fraud is very high but if you know how it works it’s probably next to impossible for a fraudster to steal money from you.

Bitcoin work on the concept called Blockchain technology at the foundational level which is the reason why it is super safe and transparent. To summarize what Blockchain is, imagine a ledger which keeps tracks of all the transactions and at the end it tells the balance amount.

The blockchain is a digital ledger that keeps tracks of all transactions just like the physical ledger we have. Blockchain basically keeps records of transactions and this can be used anywhere like banking and voting. It maintains anonymity and verifies each transaction at initiator’s end.

Blockchain organizes data in batches aka blocks and these blocks are cryptographically validated so that they call link together and form a chain.

This is the tricky part, let’s break it down to understand well.

How does Blockchain work?

This is a two step process

  1. Cryptographically validating: Here the batches or blocks are created as and when a transaction is made. Let’s name it 12345 as the transaction id, so this validation will be done so that no other blocks are created with an id 12345, ever after.
  2. Chain formation: Once the blocks are validated the algorithm then brings these blocks to a central window where they are listed in form of table. Here anyone with access to the internet can see this list but cannot make out who is involved and what is involved.

Here are two videos to better explain this concept.

Further, Bitcoin uses Public-Key Cryptography to function. Two pieces of information to create and authenticate messages. The key generated in Bitcoin wallet is the most important part of this technology. No matter what, never share this key with anyone. It would literally mean sharing your credit card details. The unique key aka “seed” is the only way that can unveil the anonymity of an individual.

The key would be long and hard to remember, write it on a piece of paper and keep it safe. Never save it on a notepad online, it is more vulnerable there.

Here’s a video that pretty much covers everything.

Bitcoin for Beginners

Coming to basics, there are certain nomenclature & terminology in this particular technology that Bitcoin enthusiast should know.

Here’s the vocabulary of Bitcoin that you must know it before you get into the details

  • Bitcoin Address
  • Bit
  • Bitcoin
  • Block
  • BTC
  • Confirmation
  • Cryptography
  • Double spend
  • Hash Rate
  • Mining
  • P2P (peer-to-peer)
  • Private key
  • Signature &
  • Wallet

For now, I will list it but in future, I will sharing regular posts on it. Refer this page for the brief on the above-mentioned terms.

Conclusion

Since 2008 Bitcoin is in a lot of talks on its future and legality across nations. There are some countries & businesses who have started investing and consuming Bitcoin but in some, it is in Gray zone with neither legal ban nor approval. So far it is interesting to know and hope that the world economy is going to change forever.

Over to you. What do you think of this upcoming E-cash or digital currency? Share your thoughts in the comment section below. Also, share this post in your network to create awareness.

Stay tuned, a lot of buzz coming up.

Originally published at www.smarterworld.in on August 13, 2017.

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