Bitcoin & Blockchain – Bits and Blocks of Digital Currency
- What is Bitcoin?
Bitcoins are crytocurrency; it is a form of digital currency. As these are virtual currency, are not printed like the conventional paper currency (dollar, pound, rupees). Bitcoin is a “unit of account”. It acts as a simple, easy and faster way to transfer money using the Internet. In one way we can look at the nature of bitcoins as similar to equity shares having a face value and gets traded in the exchange. In other words bitcoins are a new form of currency that can be used for online trading of goods and services. Technically speaking bitcoins are algorithm based “mathematical construct” managed by software developers. Due to its mathematical construct, this digital currency has finite supply and a total of 21 million can be created by the bitcoin system but these can be further divided created into smaller parts. One bitcoin is divisible to eight decimal places. The smallest unit of account is Satoshi i.e. 1/100 million of a bitcoin.
- How to use and where to use Bitcoins?
The universal way to move the money around the world is through international wire transfer. In the conventional system transfer happens through the banking system. There is a contract between banks and bank plays their role in respective jurisdiction. We have to open a bank account and set up a merchant accounts and get the process approved and it takes its own time for us to use it. In bitcoin the community of users plays their part through a combination of “technology and trust”. We can create the bitcoin address in seconds and get going the very next second. It is instant. The online bitcoin provides that platform to transfer between users across the world. These can be used with the use of Credit Card or Debit Card. We can send money anywhere and the money will arrive immediately once the bitcoin network processes the payment. We can use across multiple online services to buy different services from that of WordPress to Reddit.
- How it works and who runs and owns Bitcoin?
Bitcoin as a currency of web is distributed, and is worldwide decentralized digital money. It is an online financial network to transfer money between people registered in the bitcoin network. No individual runs or owns bitcoin, it is managed collectively by users who use bitcoin clients. The developers who work on the software along with the users run the system. Just like the E-Mail network which is owned by nobody. It is a peer-to-peer structure working on network of computers. Bitcoins is being run using the computing power in the distributed network. It is not controlled by single centralized authority but these operate in a highly decentralized setup. In other words bitcoins are created, traded and controlled by the bitcoin users themselves. Though based on certain collated information it is assumed that originally www.bitcoin.org was registered and owned by Satoshi Nakamoto and Martti Malmi.
- How to and where to store Bitcoins?
As digital currency these are stored in digital wallet. These wallets can be “desktop wallet” to “web wallet” to “mobile wallet”. The wallets are just like computer files that contains encryption key or secret code. Every bitcoin users will have a unique address and using this “unique address” we can store bitcoins. Every unique address will have a secret matching public key with the private key; this allows the user to establish its ownership. We can share our address with others but not the private key which needs to be kept confidential, nobody can access our wallet without the secret key. Anybody having the private key can spend the bitcoins; hence the security private key is of paramount importance. All these transactions that happen in the network get stored in a large version of a “general ledger” as is captured in our conventional books of accounts. One option is to store them on the computer using bitcoin program or the other option is to entrust them onto a third-party website i.e. an online wallet or one more option is to have it in paper wallet where we can print the encryption key and store them in a safe place.
- What is the technology behind Bitcoins?
Blockchain Technology is the backbone behind the working of bitcoin system. In bitcoin, the coin moves from one hand to another in a virtual chain and a set of coins get transacted during a period that forms a list and value called “block” and this block moves between the parties in the chain. In fact the ownership gets transferred through the process of assigning to a new address. The block has unique identity and that protects confidentiality of block and can be verified by the user of that block. Though the technology appears simple but not easily deciphered and translates into commonly understandable language. In other words this blockchain acts as a public general ledger where all records are captured. The technology works similar to the concept of Wikipedia where multiple users across the world write and update the information on given topic. In Wikipedia, it is “wikis” and in Blockchain, it is “blocks”. The technology allows for instant recognition of the block by all transacting parties in the chain and it gets updated in the respective databases. The bitcoin technology is an open source code and any developer can check the software code and modify and update the version.
- How to buy & sell Bitcoins?
One option is to start mining but as a beginner it is a better option to purchase them using a conventional currency on the exchange. We can buy and sell bitcoins from the exchange or from the individual in the marketplace. The “exchange” acts as an intermediary and holds the public fund. We place a buy order or sell order in the exchange, stating the volume and price. As and when someone places a matching buy or sell order, transaction gets completed by the exchange just like a stock market trading system. One way is to buy or sell with another individual or another way is from the exchange. There is no transaction fee charged to a transfer. Always a good idea is to get onto the most popular exchanges like www.coinbase.com, www.coincorner.com, www.bitquick.com, www.bitbargain.com , which will withdraw cash from bank and covert into bitcoins at the current exchange rates. There are quick calculators to show the converted rate at given point of time.
- How do transactions works in Bitcoins?
We have to first set a bitcoin wallet with address and private key and we can then transact bitcoins between different wallets. There are bitcoin addresses which holds amount in millions and just by having the private key we could spend that amount, such is importance of the private key. The transactions get recorded in the block chain. The “block chain” acts as public ledger where all transactions are captured after it gets verified and validated by the user computers. The number of transactions recorded in the ledger is in millions using hundreds of gigabytes of storage space. The “digital wallet” keeps a secret piece of data as private key. This key is used a signature to approve the transactions. It is established through a mathematical proof that connects the owner with wallet. Bitcoins are records of transactions between address. Bitcoin transactions are not reversible. Nobody real name appears anywhere within the transactions. Once broadcast it cannot be reversed. Mobiles by default have become our digital wallet, there bitcoin mobile apps and just by scanning the QR code on another person’s mobile we can communicate the bitcoin address and do a bitcoin transaction. Bitcoin network tracks and records every transaction; we can see the how many bitcoins have been created at any point of time by visiting www.blockchain.info
- Who are miners and how mining works on Bitcoins?
As the conventional banking systems is designed on banks to print currency based on the gold reserve. Gold acts as the reference for conventional currency. Gold Miner does mining to discover gold from the mine, as and when the miner discovers gold the miner can use the same gold to create new currency, and similar analogy is extrapolated into the bitcoin system. In the banking system the central bank creates the new money and in bitcoin system there is no central control, it is the hands of miner who creates the new money. Batches of bitcoins are awarded to bitcoin miners, who in turn volunteer to run the “bitcoin client” on their computers. The CPU of client PC solves these complex mathematical problems, and user shares the solutions in the network. In other words miners are individual on computers spread across the world who are part of bitcoin network systems and keep calculating hashes for blocks. Bitcoin transaction processing is called mining and with every successful clearance of transaction the miner earns a commission in bitcoins which acts as an incentive for the miner to keep mining and keep the system running.
- What is the legal status of Bitcoin?
It is a legal currency in some part of world and it is yet to get the legal status in many other parts of the world. In countries like USA to Finland where it is assumed as legal status on the contrary countries Russia to Vietnam is not yet considered a legal currency. The bitcoin market is largely unregulated and it has only few legal protections in the eventuality of choosing the wrong online wallet service. Regulators across the world are still grappling with the thought of how to regulate the system and enable a proper use of the currency as by very nature it breaks the conventional operation in a given geographical boundary. Like all major inventions takes it time to get aligned into the regular ecosystem, bitcoin is no exception and with passage of time it will discover its own place and space to operate legitimately. Digital Currency like bitcoins is inevitable in digital age and will eventually become omnipresent like the internet in our life.
- How safe and secure are Bitcoins?
Bitcoin as system is still evolving and the technology behind is complex and not easily fathomable by common people, it needs simplification and a more secured system to be used widely. The currency is extremely volatile and much like any equity market, the price keeps fluctuating depending on multiple factors and the value in wallet can go from a few hundreds bitcoins to single digits in matters of few days. There is a definite security and reliability risk as it is yet to get covered under a proper regulatory authority and full proof security system. We may loose the entire amount in case of system failure or forgetting the password or losing the secret code. There is this inbuilt technical risk in this mode of financial operation. Also, the system like many other systems is constantly under the radar of hackers and in case our account gets hacked, there is no recourse to get back. It isn’t prudent to just casually try this bitcoin system unless and until somebody does a proper search and research on the mechanism of operation where it succeeds and where it fails, and sufficient planning and preparation done before starting to use the bitcoin system for making money through mining or running business or speculative trading.