What is bitcoin / where did bitcoin come from?

What is bitcoin / where did bitcoin come from?

Bitcoin refers to two things. Bitcoin is a digital currency. It is also an online payment method in which bitcoins are used.

Bitcoin is the first virtual global, decentralized exchange money/coinage that lets you to send and receive money from one person to another without including any third party or middle man like broker and bank. It’s a transaction between the sender and receiver, just two people or peer-to-peer. You just need your computer and internet to make transaction because Bitcoin is basically one type of software. Transferring money via Bitcoin is just like sending an email. It just takes a couple of minutes to transfer the virtual money.

Bitcoin is digital money used for protected and prompt transfer of value anywhere in the world. It is not controlled by anyone or issued by any bank or government – instead it is an open and free network which is managed by its users and anyone can take benefits from it. Much in the way email improved communication by making it fast and cheap, bitcoin is an improvement on existing payment methods which were not designed for the internet era.

You might think that the lack of control could mean chaos, but that’s not true at all. That’s because blockchain, the technology behind Bitcoin is one of the most accurate and secure systems ever created.

Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.

It’s the first example of a growing category of money known as cryptocurrency.

Bitcoin price is so volatile everyone is curious. Bitcoin, the category creator of blockchain technology, is the World Wide Ledger yet extremely complicated and no one definition fully encapsulates it. By analogy it is like being able to send a gold coin via email. It is a consensus network that enables a new payment system and a completely digital money.

It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. Bitcoin was the first practical implementation and is currently the most prominent triple entry bookkeeping system in existence.

There are two main issues in designing a decentralized payment system without any intermediary:

  1. Recording and Verification of transactions
  2. The problem of double spending: When we spend money through debit card, the bank will debit (deduct) the money from our account and we will not be able to spend it again. But, without an intermediary, a person could spend bitcoins, delete that transaction from the record and spend the same money twice. We can look at it as, spending more than the amount we actually have in our bank accounts.

 

What makes it different from normal currencies?

Bitcoin can be used to buy things electronically. In that sense, it’s like conventional dollars, euros, or yen, which are also traded digitally.

However, bitcoin’s most important characteristic, and the thing that makes it different to conventional money, is that it is decentralized. No single institution controls the bitcoin network. This puts some people at ease, because it means that a large bank can’t control their money and they no need to pay any other fees.

 

Who created it?

Bitcoin is a new currency that is developed by a person or a group under the pseudonym of Satoshi Nakamoto in 2008 and getting operational since early 2009. A software developer called Satoshi Nakamoto proposed bitcoin, which was an electronic payment system based on mathematical proof. There are no transaction fees and no need to give your real name and details. More merchants are beginning to accept them: You can buy web-hosting services, pizza or even manicures.

Satoshi’s anonymity often raises unjustified concerns because of a misunderstanding of Bitcoin’s open-source nature. Everyone has access to all of the source code all of the time and any developer can review or modify the software code. As such, the identity of Bitcoin’s inventor is probably as relevant today as the identity of the person who invented paper.

Who prints it?

No one. This currency isn’t physically printed in the shadows by a central bank, unaccountable to the population, and making its own rules. Those banks can simply produce more money to cover the national debt, thus devaluing their currency.

Instead, bitcoin is created digitally, by a community of people that anyone can join. Bitcoins are ‘mined’, using computing power in a distributed network.

This network also processes transactions made with the virtual currency, effectively making bitcoin its own payment network.

 

So you can’t churn out unlimited bitcoins?

That’s right. The bitcoin protocol – the rules that make bitcoin work – say that only 21 million bitcoins can ever be created by miners. However, these coins can be divided into smaller parts (the smallest divisible amount is one hundred millionth of a bitcoin and is called a ‘Satoshi’, after the founder of bitcoin).

What is bitcoin based on?

Conventional currency has been based on gold or silver. Theoretically, you knew that if you handed over a dollar at the bank, you could get some gold back (although this didn’t actually work in practice). But bitcoin isn’t based on gold; it’s based on mathematics.

Around the world, people are using software programs that follow a mathematical formula to produce bitcoins. The mathematical formula is freely available, so that anyone can check it.

The software is also open source, meaning that anyone can look at it to make sure that it does what it is supposed to.

Characteristics of Bitcoin

Bitcoin has several important features that set it apart from government-backed currencies.

1. It’s decentralized

The bitcoin network isn’t controlled by one central authority. Every machine that mines bitcoin and processes transactions makes up a part of the network, and the machines work together. That means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown – or simply decide to take people’s bitcoins away from them, as the Central European Bank decided to do in Cyprus in early 2013. And if some part of the network goes offline for some reason, the money keeps on flowing.

2. It’s easy to set up

Conventional banks make you jump through hoops simply to open a bank account. Setting up merchant accounts for payment is another Kafkaesque task, beset by bureaucracy. However, you can set up a bitcoin address in seconds, no questions asked, and with no fees payable.

3. It’s anonymous

Well, kind of. Users can hold multiple bitcoin addresses, and they aren’t linked to names, addresses, or other personally identifying information.

4. It’s completely transparent

Bitcoin stores details of every single transaction that ever happened in the network in a huge version of a general ledger, called the blockchain. The blockchain tells all.

If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address. They just don’t know that it’s yours.

There are measures that people can take to make their activities more opaque on the bitcoin network, though, such as not using the same bitcoin addresses consistently, and not transferring lots of bitcoin to a single address.

5. No Transaction fees

Your bank may charge you a £10 fee for international transfers. Bitcoin doesn’t. However exchanges do. They will charge for each transaction that happens. Some charge flat rate minimums and others only charge enough to cover the processing cost for them.

6. It’s fast like Email

You can send money anywhere and it will arrive minutes later, as soon as the bitcoin network processes the payment.

7. It’s non-reputable

When your bitcoins are sent, there’s no getting them back, unless the recipient returns them to you. They’re gone forever.

So, bitcoin has a lot going for it, in theory. But how does it work, in practice? Read more to find out how bitcoins are mined, what happens when a bitcoin transaction occurs, and how the network keeps track of everything.

 

Why Bitcoins?

Bitcoins can be used to buy merchandise anonymously. In addition, international payments are easy and cheap because bitcoins are not tied to any country or subject to regulation. Small businesses may like them because there are no credit card fees. Some people just buy bitcoins as an investment, hoping that they’ll go up in value.

 

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