What is Bitcoin?

Launched in 2009, Bitcoin is a form of digital currency, also known as cryptocurrency, that is an electronic payment system baked by mathematical proof. It is not tied to any bank or government. It is created and held digitally. It was invented by an account named Satoshi Nakamoto. An Australian businessman claimed to have founded Bitcoin, but that fact is not without ambiguity. Regardless of who created it, it is controlled by no one.

what is bitcoin

How is it different from other forms of money?

Unlike its traditional counterparts- euros, pounds and dollars, Bitcoin is not printed. It is produced by users who “mine” them using a software. Transactions by the users are gathered in the form of “blocks” which is then converted into a complex math solution.

Mining is a term used to define the process of people competing, to acquire bitcoins by solving complex mathematical puzzles using their computers. The software program used to work these mathematical formulas is open source. That means it is available for anyone to check its workings.  The mathematical formula too is available free of cost. Presently, 25 bitcoins are awarded to the winner. This occurs every 10 minutes, roughly.

There are no transaction fees either. It is decentralized, meaning, it is not regulated by any institution; hence the money is not controlled by anyone. It is stored in a “digital wallet” which a user can have on his computer or cloud. The users can receive and send money, paying for goods. Contrary to the rules that regulate banks in the US, the Bitcoin wallets are not insured by the Federal Deposit Insurance Corporation.

how to bitcoin works

 How does it work?

The coins are created by the users who “mine” them. They transact in bitcoins, sending and receiving this currency. Bitcoins can also be bought and sold in exchange for traditional currencies and the US stock exchanges.

 What is its worth?

A company named Coinbase, that assists users in exchanging bitcoins, claims that one bitcoin is said to have been traded for a staggering amount of $1734.65. This is particularly interesting as an ounce of gold is traded for less than $1230.

The value of this cryptocurrency is subject to sharp fluctuations. If one has a bitcoin worth $457.04, which was the value of one bitcoin a year ago, it doesn’t mean that its worth will always go up. It is recorded that in one instance the currency faced a dive of 23 per cent against the US dollar. It was reported that it declined further, in 10 days’ time.

 How many bitcoins can a user create?

Even though the Bitcoin system is not regulated or controlled by an external institution, it is interesting to note that there are rules that govern this system. It states that users can create a maximum of only 21 million bitcoins. But these coins can be further divided into smaller units. The smallest amount of bitcoin that can be created, is one hundred millionth of a bitcoin. It is named after the founder and called a Satoshi.

 Why is it garnering such popularity?

Since Bitcoins are a set of computer codes that are signed digitally each time they are transacted, and travel from one user to the next, this process doesn’t require the parties involved to know the identity of the other. This means that the users remain anonymous. The system is thus quite popular amongst its users who could range from speculators, technology enthusiast and even criminals. Though the identity of the user remains anonymous, the accounts and transactions can be traced. When the bitcoins are converted to regular currency, investigators may be able to track the owners.

For example, there are three accounts that are tied to a ransomware attack, which have seen no transactions. Cashing in on their bitcoins could lead them to be traced and be caught. The amount involved in the payment of ransom, from the ransomware attack, is said to be less than $70,000, according to the US Department of Homeland Security and Counterterrorism. However, there could be a possibility of other accounts involved in such attacks that the Department is unaware of.

 Who are the users of Bitcoin?

Many large companies have started accepting bitcoins as legitimate means of transaction. These companies allow customers to buy products online with bitcoin. The list of (some of the big) companies using bitcoin includes, but is not limited to:

  • Microsoft
  • Subway
  • Virgin Galactic
  • Expedia
  • Dell
  • Wikipedia
  • Whole Foods
  • Bloomberg.com
  • Shopify.com
  • Universidad de las Américas Puebla
  • A major university of Mexico
  • Lionsgate Films
  • T-Mobile
  • Save the Children
  • University of Ohio

The list includes entities ranging from major technology firms, food restaurant franchises, travel booking sites, online newspaper companies, online retailers, production studios, global charity organizations and universities.

There is no denying that the popularity of bitcoin is far behind the traditional currency, cash and cards. However, there is a growing interest in this cryptocurrency, and its credibility is acquiring further relevance with attention from some of the biggest multinationals that are adopting it in their transactions. There is no lack of those doubting its legitimacy due to the absence of government backing, but those using it seem pleased.

 How is the security of the Bitcoin system ensured?

Before we move to that question, it is crucial to understand an important term.

Blockchain:

  • A blockchain is a digital ledger. It chronologically and publicly records the transactions that are made in Bitcoin, or for that matter any other cryptocurrency. It is ever growing, meaning, with every new set of recording of transactions, a completed block is added. This block is added in a chronological, linear order.
  • Another important term to know is “node”: A Computer that is connected to the Bitcoin network using a client that undertakes the task of validating and relaying transactions, is called a “node”. Each node receives a copy of the blockchain, which, upon joining the Bitcoin network, gets downloaded automatically. The Blockchain thus has complete information pertaining to the address and balances, right from the origin to the latest completed block.

This blockchain prevents swindlers from spending a bitcoin twice. The miners are appreciated and rewarded with gift cards or bitcoins, for their efforts. Counterfeiting is not an issue as long as the miners ensure the security of the blockchain. It is these miners who comprise a network of tech savvy users, who keep the system honest and in place.

Like any other invention involving the inclusion of money, bitcoin is far from flawless. Following are the advantages and disadvantages of bitcoins.

 Advantages of Using Bitcoin

Transparent Information:

  • With blockchain the transactions that are completed, are available for anyone to see.
  • No personal information is tied to the account, only the users public address
  • Verification of transactions can be done by anyone and at any time in the Bitcoin blockchain
  • Because it is cryptographically secure, it can’t be manipulated by either government or an individual

More Freedom in Transactions:

  • In the absence of a central controlling organization, users are in control of their money
  • Money can be transferred and received from anywhere in the world, and at any time
  • This system is not limited by the restrictions pertaining to banking norms like public holidays, bank holidays, etc.

Extremely Low Fess:

  • The system charges no fees. Even in the case of fees charged, the amount is very low
  • It comes with the option of expediting your transaction by including a fee. If you include a fee, your transaction will get priority within the network, and it will get processed quicker. The higher the amount of fee, the quicker the processing
  • The charges for converting bitcoins into fiat currency is cheaper in this digital currency exchange. These fees are lower than those charged by PayPal and credit cards

Security and Control:

  • These cryptocurrencies can be backed up and be encrypted to ensure that your money remains safe
  • The fact that no personal information is used, this system protects the users from identity theft
  • Users are allowed complete control over their money
  • No extra fee can be charged by merchants without being noticed. It requires consumer discussion and consent, before adding any charges

Lower Risks:

  • There is minimal possibility of losses or fraud, as bitcoin transactions can’t be reversed, and do not include personal information about the users.
  • Blockchain is a powerful concept. It makes conning very difficult because of the public nature of the ledger

 Disadvantages of Using Bitcoin

Volatility

  • The price of Bitcoins fluctuates massively depending on global events and developments in digital currencies
  • Given the demand for these cryptocurrencies and their limited availability, there is high volatility in this currency

Ambiguity

  • Many people are still unaware of the features of Bitcoin
  • There is lack of clarity about this system
  • There aren’t enough people educated about this system for medium-sized businesses to start accepting bitcoins
  • Lack of government endorsement has prejudiced some people against adopting it

Nascent stage of this system leaves much room for improvement

  • Despite the fact it has been in existence for nearly 8 years now, the system is still incomplete in many ways
  • More features will have to be incorporated to make it secure.

This currency, like any of its counterparts, is not free from inadequacies and ineptitude, but it is one of the fastest growing cryptocurrencies. Even though general awareness about it is still lagging far behind, it has made its mark by being endorsed by big names. It has gained a fine reputation in the form of being adopted and incorporated in big and respected multinationals and organizations. It has been in existence for a while with future prospects looking bright, even players from the educational sector are jumping in to embrace this system.

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Volatility is a major factor when considering this currency.

Very recently, in May 2017, Bitcoin hit a value of $1600. In May 2017 alone, in a span of just 33 days, the currency appreciated by 33 per cent. With the increasing value, there is also bad news for the currency. The US Securities and Exchange Commission rejected a bitcoin Exchange traded Fund that was proposed by the entrepreneurs, Cameron and Tyler Winklevoss.

In May 2017, it was reported that about $2 billion was wiped off Bitcoins value in a matter of three days. Truth be told, because of the popularity of this system, there are instances of huge backlogs of transactions, that wait to happen in bitcoin. With this pending transaction number being more than four times from six months ago, there is delay in processing of transactions. This turns out to be a major problem for a system that prides, and bases its business model on delivering quick and comparatively cheaper service.

Due to this incident of backlogs, Bitcoin Unlimited came into picture. This group suggested the increasing of blocks to allow for more transactions to be processed. While some backed this idea, others were concerned regarding the safety of Bitcoins system with the expansion.

This event was significant because Bitcoin Unlimited holds nearly 11 per cent market share of overall nodes that are out there. These nodes are instrumental for Bitcoin, the entire system of Bitcoin is because of these nodes. If there is an adoption of Bitcoin Unlimited by even 50 per cent of Bitcoin users, then it would give rise to two major blockchains, and create a “Fork”, made of Bitcoin Core, which is the main software behind the infrastructure and Bitcoin Unlimited, currently.

This, if it happens, would mean that there could be two blockchains and both would run alongside each other, with nodes running with them. More importantly, this would also mean the creation of two currencies – Bitcoin and Bitcoin Unlimited.

With news in the market of the possibility of another blockchain, Bitcoin witnessed a deep dive in its price.

The prospect for Bitcoin is, however, one of promise. A recent survey by a Tokyo based international financial services company, reported that in the US, Japan and Hong Kong, only a small fraction of retailers had investments in digital currencies. In the US and Japan, only 3% of retail investors have invested in digital currencies. China had a slightly higher percentage at 10%.

Japan scored the highest in its familiarity with digital currencies compared to the US and Hong Kong.

This survey sheds light on the potential for growth in these markets.

Bitcoin is still considered to be in its incipient stage, with so much in terms of features, security and volume efficiency, that requires improvement.  But the currency is widely popular with the technology savvy segment, which we hope will contribute towards making this currency adept in fighting its current ineptitude.

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