How Bitcoin works

 

How Bitcoin works


Sounds like a lot of money and a financial bubble. This is Bitcoin and it can show us the future of money. Bitcoin is a form of virtual currency made possible by the internet, ultra-powerful computers and the willingness of many people to accept new forms of monetary exchange.

Bitcoin has some similarities to real-world currencies and is gaining acceptance as a payment method among more merchants, retailers and individuals, especially online and offline. 

You can buy Microsoft products with Bitcoin, buy plane tickets with Expedia, or buy gift cards from supermarkets like Walmart. However, Bitcoin is very different from traditional currencies. Unlike the dollar or sterling, Bitcoin is not backed by any government. It is a completely decentralized form of currency.

Bitcoin is not tied to a central banking system or issuing authority, which is a big part of its appeal. This currency exists instead of being swallowed by a system that often suffers from human greed and manipulation. 

In an online world of math and smart encryption protocols. You can use Bitcoin for all kinds of real-world transactions. 

To do this, you must first purchase Bitcoin at your discretion using a credit card, bank account or anonymously using cash. Your Bitcoin will then be transferred directly to your Bitcoin wallet, allowing you to send and receive payments directly to buyers or sellers without an intermediary such as a bank or credit card company.

By removing the middleman from the transaction, you can pay much less in associated costs. Each party to the transaction can maintain a much higher level of anonymity, which has advantages and disadvantages for everyone involved. Think of Bitcoin as the digital equivalent of a cash transaction. If you think like that, this is no way to do business.

Spending or receiving Bitcoin is as easy as sending an email and can be done from your computer or smartphone. This simplicity makes us think that there is a lot of complex math behind all these transactions to keep them legal and safe.

Read on to learn more about Bitcoin's mysterious rise and the inner workings of the network that supports the so-called "cryptocurrency." Contents

In this article you will know Bitcoin's Backstory, One Complicated Coin, A Question of Money, More than a Bit Scary, Bitcoin's Extralegal Activities and Bitcoin Is Just the Beginning.

 

Bitcoin's Backstory

Bitcoin's origins are the stuff of Internet legend. In 2008, a person working under the pseudonym Satoshi Nakamoto published an article explaining the validity of the Bitcoin concept. 

Nakamoto cited the 2008 financial crisis, the failure of government-backed currencies, and corruption in the existing banking system as motivating factors for the creation of a new currency.

According to its creators, Bitcoin will be a clean form of money that works for ordinary citizens of the world, not those in power. In 2009, Nakamoto launched the first Bitcoin app and also produced the first Bitcoin for circulation. Then it was just a matter of spreading the word about the new currency.

To use Bitcoin, you need a Bitcoin wallet that encrypts and stores your Bitcoin balance on your computer, smartphone or cloud. You can then load your wallet with Bitcoins using your bank account, credit card or other payment method. After that, it is important to find a provider that accepts Bitcoin as payment.

When Bitcoin was first launched, the returns were low, but today there are many sellers who accept these new coins. These include restaurants, clothing stores, dentists, etc. Some people even use Bitcoin to rent real estate and buy cars.

Gift card website Gyft accepts Bitcoin payments, allowing you to exchange Bitcoin for store credit that can be used at all major retailers and restaurants in the United States.

If you follow the financial news, you probably know that Bitcoin is not only used for goods and services. Much of the hype surrounding Bitcoin is based on speculation. 

In other words, people use online currency exchanges like Coinbase to put real dollars and yen into Bitcoin in the hope that Bitcoin will increase in value. Fortunes have come and gone as Bitcoin's value soared through the charts.

But how can this invisible virtual currency have so much economic power? How might a new form of money work? Well, it's complicated.

Read on to learn how Bitcoin comes to life.

 

Who is Satoshi Nakamoto?

The creator of Bitcoin has never revealed his identity. According to the Bitcoin site, after working on the project for several years, the mysterious founder handed it over to the community that grew up around the concept.

 

One Complicated Coin

Bitcoin is different from gold. No one can dig them out of the ground. They are also different from paper money. No central authority prints hard-to-counterfeit physical Bitcoin notes for circulation. Instead, Bitcoin is based on a completely decentralized computer network and incredible encryption technology.

First, you need to understand that the entire Bitcoin system works on a peer-to-peer (P2P) network.

This peer-to-peer architecture is similar to a file-sharing network where people can share all kinds of data, including copyrighted music, movies, and more. 

A network that allows free distribution. It is a resilient system. This means that there is no central computing hub that controls all Bitcoin-related processes. Instead, each Bitcoin user's computer shares the computational burden of creating Bitcoin and recording transactions as part of the network. This decentralized nature makes Bitcoin (so far) immune to government interference, regulation and control.

Before someone can use Bitcoin, they must first mine the coins through a process called Bitcoin mining. Any computer can start mining Bitcoin using a free mining application.

Mining requires the entire network of participating Bitcoin computers to perform a certain amount of work before being rewarded in Bitcoin.

Simply put, this work involves a lot of calculations, and the income goes to the owner of the computer that completes them. Some people invest thousands of dollars in very powerful computers to mine Bitcoin.

Mining has become a computerized arms race where only those at the top can profit.The actual amount of work required will vary. The network regulates this workload so that the number of Bitcoins grows at a constant, predetermined rate.

We will continue to do this until the number of Bitcoins in circulation reaches the last 21 million. The current mining process produces 25 Bitcoins every 10 minutes.

Every four years, the number of coins that can be mined will be halved until 2140, when the maximum number of coins will be reached. After that, the number of Bitcoins in circulation is fixed.

As explained, you store Bitcoin in a digital wallet. When you send or receive coins, they are verified with a digital signature called an encryption public key, which prevents counterfeiting and makes your coins recognizable online.

In reality, there are no actual Bitcoins in the wallet, only public encryption keys associated with each Bitcoin transaction.

One of the key features of Bitcoin and all virtual currencies is that the decentralized network shares a public ledger (called the blockchain) of all Bitcoin transactions.

Blockchain provides a reliable and redundant way to track the number of Bitcoins in circulation. It all works because of Bitcoin's amazing open source code (which means it's visible to everyone).

Open source software is often used by programmers who oppose profiteering and corporate control. Any experienced programmer will know how Bitcoin programming works and that's okay. It is not a code that protects transactions. Instead, it is a shared blockchain ledger that verifies the legitimacy of each transfer.


A Question of Money

If you have Bitcoin stashed away in your wallet, you can just leave it there and hope it grows in value. Alternatively, you can pay in your local currency. If you store Bitcoin on your computer, remember that there is no central company to back up your wallet. 

This means you need to back up your balance. It's best to save these notes to a device, such as a flash drive, that you can keep in a safe place.

Otherwise, you will lose your Bitcoin savings if your hard drive crashes and your wallet disappears with it. Another option is to use an online Bitcoin wallet that stores all your encryption keys in the cloud.

The advantage of an online wallet is that you don't have to worry about constantly backing up your data. However, the downside is that it puts Bitcoin security in the hands of a third party.

If you lose your keys, there is no way to get your bitcoins back.

Bitcoin transactions are irreversible and generally fast, but not as instant as credit cards. Because the Bitcoin verification process requires sharing transaction data with the entire network, you may need to wait a few minutes for your payment to complete.

The biggest advantage of Bitcoin is that there are no transaction costs. Since there are no national or international regulations regarding Bitcoin, you can transfer the virtual currency from any country without the high transfer fees charged by banks or services such as Western Union. 

The system has no administrative rights, so your account has no restrictions and cannot be blocked. This is a time when many people wonder about the legitimacy of Bitcoin.

How can a coin appear on the internet overnight and have real value? Economists can give long, philosophical explanations about the history of money, but the short answer is that all money has value because people believe it has value.

Bitcoin is no different in this regard. It is embraced by libertarian activists, financial speculators, and people who no longer trust government-backed banking systems. 

These people believe in the mathematics and cryptography of the Bitcoin system, and their belief has proven to be contagious, lending even more legitimacy to the virtual currency.

 

More than a Bit Scary

Bitcoin is gradually gaining legitimacy. But the problem is that people actually believe in the currency. This is where this new currency gets scary.

Widespread speculation has sent Bitcoin's price on a dizzying roller coaster ride. In 2010, a Bitcoin was worth just a few cents. Over the next few years, the value of Bitcoin fluctuated from hundreds of dollars to just a few dollars. But 2017 had nothing in store for investors. At the time, Bitcoin speculation caused the price of a single Bitcoin to rise from $1,000 to $16,000.

For many observers, Bitcoin's popularity and price rise were similar to the dot-com and real estate bubbles. Economists warn that like all bubbles, the Bitcoin bubble will eventually burst, bringing with it a lot of luck. From this perspective, Bitcoin sounds like a currency only for fools and speculators. Additionally, online currency exchanges remain the hub for most Bitcoin transfers.

Exchanges are definitely needed as they help you convert your bitcoins into local currency. However, in a decentralized system, these exchanges become attractive targets for government regulators and malicious hackers.

For example, hackers may not yet be able to use Bitcoin's sophisticated blockchain technology to create counterfeit coins or fraudulent transactions. However, they can certainly attack exchanges, which are just as vulnerable as any other type of website. 

In one disclosed incident, hackers launched a distributed denial of service (DDoS) attack on the popular exchange Mt. 850,000 Bitcoin Lost to Gox. Chaos ensued and the value of Bitcoin plummeted.

Bitcoin is, of course, a high-risk asset. As you can see, there are other potential downsides to the Bitcoin system.


Bitcoin's Extralegal Activities

If Bitcoin seems a little anarchic, that's because it is. Bitcoin eschews the traditional paradigm of government regulators controlling and managing the money supply.

Bitcoin allows people all over the world to gamble online, something that is highly frowned upon by the US federal government.

Bitcoin is also infamously and irrevocably linked to Silk Road, a black market site where people can secretly buy anything, including illegal drugs. The original Silk Road was shut down in 2013 and its founder was sentenced to life in prison, but many Silk Road-style marketplaces have since appeared on the dark web.

Bitcoin's reputation was tarnished by its early connections to the Silk Road and other criminal networks. The media has often highlighted Bitcoin's role on the dark web. Should I hire a thief or a gun? How about defacing photos of political enemies? Bitcoin is plentiful, and with a little research, you can find the right person for any job.

However, as more and more cryptocurrencies enter the market, criminals are losing faith in Bitcoin. In fact, law enforcement could weaken Bitcoin's popularity, causing more cybercriminals to switch to fully encrypted currencies like Monero and Dash.

The relative anonymity of Bitcoin and other cryptocurrencies also makes them useful for tax evasion. Traditionally, hiding assets in offshore accounts takes some work. But with Bitcoin, you can store millions of dollars in a digital wallet, away from all tax collectors, and complete the process in an afternoon. Clearly, governments and concerned citizens are grappling with hidden scandals on the Internet.

The government doesn't want its citizens to benefit from tax breaks, and drug enforcement agencies sure don't like it when people find high-tech ways to evade the law. Despite these legal or ethical issues and the inability to predict its value, Bitcoin has endured. This has many economists and consumers wondering what the future holds for currencies.

 

Bitcoin Is Just the Beginning

The sharp peaks and troughs in the value of Bitcoin are a clear warning sign that this new cryptocurrency is not stable. It is difficult to say what role Bitcoin will play in the future economy until more people use the currency to buy things instead of speculating on the currency itself.

Is the world really ready to replace the outdated government-backed system of coins and notes with a purely digital currency? Or is the blockchain technology behind Bitcoin more revolutionary than the currency itself? Bitcoin's success as a speculative commodity has opened the door to hundreds of new cryptocurrencies, all competing for a niche in the market.

As mentioned earlier, some have deep encryption and anonymity. Others boast faster transaction processing speeds. However, the most promising Bitcoin alternative is still Ethereum. Ethereum is not a pure currency, rather a full-service financial platform. Unlike Bitcoin, you cannot use Ethereum currency (called Ether) to buy things in the real world.

Ethereum's true power comes from its state-of-the-art blockchain technology and powerful programming language. Economists are excited about Ethereum's potential to usher in an era of "programmable money" and "smart contracts" that run on cryptocurrencies. Again, the underlying blockchain technology could be the game changer rather than the currency itself.

Bitcoin, Monero, Dollar, Euro, etc. In the global economy, we all depend on important monetary systems. Perhaps the future of money will become much easier with electronic transactions processed in any currency on a secure and decentralized blockchain.

But before that happens, Bitcoin and other cryptocurrencies need to solve their energy problems. All the computing power required to mine and verify Bitcoin leaves a huge carbon footprint. Environmentalists estimate that one Bitcoin transaction uses the same amount of energy as burning nine American homes for an entire day.

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