Bitcoin is the first decentralized digital currency. Bitcoin is a worldwide cryptocurrency and digital payment system. It is the virtual banking currency of the internet. Bitcoins are digital coins that can be sent through the Internet. It was first invented by Satoshi Nakamoto in the year 2009. It is open-source software, no single person or company owns this network just like no one owns the internet.
How does Bitcoin work?
Unlike traditional currencies, which are issued by banks, Bitcoin has no central authority. Instead, it is a peer to peer computer network made up of users’ machines. Bitcoins are completely virtual coins designed to be ‘self-contained’ for their value. They do not need banks to move and store the money. Once you own bitcoins, they are just like gold coins. You can use bitcoins to buy anything absolutely or keep it with yourself. That way their prices boom up and later you can sell them to make more money.
Several currency exchanges exist where you can buy or sell bitcoins for dollars. You can also use it to sell or buy euros or any other currency. Bitcoins are kept in the digital wallet on your computer or mobile. Anything can be purchased with Bitcoin. The Bitcoin network is secured by individuals called Miners. They verify the transactions happening in the bitcoin network. After the transactions are verified they are recorded in the public distributed ledger called the Blockchain. Bitcoin transactions are irreversible.
The three main parts involved in the working of Bitcoin are:-
Balances (Blockchain) – The blockchain is a shared public ledger. All confirmed transactions are included in the blockchain. This way wallets can calculate their spendable balance. The integrity and chronological order of the blockchain are enforced with cryptography.
Transactions – A transaction is a transfer of value between Bitcoin wallets. Bitcoin wallets keep a secret piece of data called the private key which is used to sign transactions. The signature also prevents the transaction from being modified by anyone once it has been issued. The transactions happen between users and are confirmed in the network through a process called Mining.
Mining – Bitcoin miners help keep the network safe by approving transactions. Bitcoins are stewarded by ‘miners’, the massive network of people who contribute their personal computers to the Bitcoin network. Miners act as a swarm of ledger keepers and auditors for Bitcoin transactions. Miners are paid in bitcoins for each successful creation of a block in Blockchain. Mining is an integral part of Bitcoin. It ensures fairness while keeping the Bitcoin network stable, safe, and secure.
Mining goes as follows:-
1) Verify if the transaction is valid
2) Bundle transactions in a block
3) Select the header of the most recent block and insert it in a new block as a hash
4) Solve the proof of work problem
5) When the solution is found the new block is added to the local blockchain and propagated into the network.
Advantages of Bitcoins
- It can be transferred from person to person without going through a bank or clearinghouse. Hence this P2P transaction is easy and faster. Also, the transaction fee is lower.
- Bitcoin verifies the transactions in an encrypted manner and hence is very secured.
- Bitcoin is open-source, nobody owns it and anyone can use it.
- It can be universally used without any restrictions to one particular country.
- The transaction fee is either minimal or nil.
- There are no third party interruptions involved.
- Easy mobility in making payments through bitcoins.
- Bitcoins cannot be stolen.
In the year 2009, the bitcoin value was in mere cents, its price was $ 0.0001. But in the year 2013, it rose to $100, the year which showed a drastic increase in bitcoin price.
The year 2017 has been the Bitcoin year, In Jan 2017, the bitcoin value was $1000, and as of December 2017, its value skyrocketed to about $18,000.
Bitcoin’s price has the potential to hit over $100,000 in 10 years. In 2020, It will hit $30,000. A few bitcoins in hand and you will be a millionaire in a few years down the lane. Currently, there is more than 2 billion dollars worth of bitcoins in existence, bitcoins will be stopped from creating when their value reaches 21 billion coins which will be somewhere in the year 2040.
Disadvantages of Bitcoin
Lack of Awareness – Many people are still unaware of digital currencies and bitcoin. People need to be educated on this matter.
Niche field – Bitcoin is still in the infancy stage, and it takes time for making its presence felt.
Easy to lose – If someone hacks your bitcoin wallet, then you lose your bitcoins forever.
Untraceable – People can buy and sell illegal commodities with less risk of being traced, hence it increases the crime rate.
Volatile – The bitcoin prices are very volatile and they change now and then.
Bitcoins for investment
Many Bitcoin supporters believe that the future is in digital currency. Those who endorse it are of the view that it facilitates a much faster, no-fee payment system for transactions across the globe. Although it is not itself any backed by any government or central bank, bitcoin can be exchanged for traditional currencies. Its exchange rate against the dollar attracts potential investors and traders interested in currency plays. Indeed, one of the primary reasons for the growth of digital currencies like Bitcoin is that they can act as an alternative to national fiat money and traditional commodities like gold. Like any asset, the principle of making a profit in bitcoin is to buy it when its value is low and sell when it reaches a peak value.
The simplest way an average person can invest in Bitcoin is to outright buy some. Buying BTC today is simpler than ever, with many established firms in the US and abroad involved in the business of buying and selling bitcoins. For example, Coin Base.
Exchanges are not the only way you can acquire bitcoins. A popular route for buying BTC offline is with Local Bitcoins. The website pairs up potential buyers and sellers
Being able to purchase Bitcoin means that you need to have a ‘’virtual wallet’’. This wallet is a software that you install on your smart mobile phone or your laptop. It is an app that enables you to keep track of your bitcoins which means that you can monitor your transactions. Keep in mind that if you want to have bitcoins, you need to have real money. Your real money van is deposited through online services to buy bitcoins. Additionally, you can use the third party that is a certified mediator between sellers and buyers and transfer your money directly from the bank account without using online payment. Once you are done with a payment you can take your bitcoins from the website. Note that you can work with bitcoins like with stocks, that way you use a kind of ‘’exchange’’ and it is a simple and straightforward way of doing transactions.
As there are two sides to the same coin, Bitcoin to has its advantages and disadvantages.
It does provide a lot of advantages, Bitcoins can be helpful to a lot of people. Since they are an international currency, you can use them in any country without having to convert between currencies. The Blockchain is secure and it lets you make sure your money goes to/comes from the right person. People receiving Bitcoins won’t have to pay anything for the transactions, and Bitcoins have a lot of support. All of these will help Bitcoin get more users, and if everyone uses Bitcoin it could replace official currencies. Sure, it has some risks too:-
Bitcoin carries many inherent risks. Many investor alerts have been issued by the Securities and Exchange Commission (SEC) and Consumer Financial Protection Bureau ( CFPB ).
Bitcoins are a rival to the government currency and they may be used for Black market transactions, illegal activities or tax evasion. As result governments in many countries have brought in strict rules to ban the use and sale of bitcoins. So in case of any fraud or theft, the government is not coming to the rescue of the investors and hence investors are required to invest in Bitcoins at their own risk.
But as time goes on, and the government comes in support for the Bitcoin investors then the risks involved in it will be mitigated and that day we will surely say that we are in the Bitcoin era.
In the beginning, the concept of bitcoin might seem a bit difficult. However, by now many people found it practical. It has various applications and it has an overall impact on your buying power. For example, you can use bitcoin technology to create contracts while doing business, or you can use it to reduce cases of fraud and forgery by making public unchangeable public records. There are many more practical uses of bitcoin technology but it will take a while until society accepts its potential and embraces it to the fullest.
I am a freelance content and article writer interested in technical topics.