What is Bitcoin and How Does it Work?

What is Bitcoin and How Does it Work?

The main difference between such payment networks as Visa or Mastercard and Bitcoin is that there is no self-ownership. Instead of being guided by a single person, Bitcoin is a decentralized platform connecting computers around the world to supervise transactions, much the same as a network of servers that makes the Internet function.

Decentralized Nature of Bitcoin

As no centralized body guides Bitcoin, no force can make new users uncover their true identities. The network was created so that no authority as a government or a corporation could control this financial network. The creators encourage new computers to join the system and keep track of Bitcoin transactions by releasing new coins every 10 minutes. These coins are given to one of the computers and help control transactions and manage the platform.

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Bitcoin is not printed by any authority and, thus, creates its own rules. While traditional currency is printed by central banks that can produce more money to cover the national or external debt, Bitcoin is not subject to devaluating for this reason as they depend on “market forces” only.

What is the Difference Between Bitcoin and Traditional Currencies?

Just as regular dollars and euros Bitcoin can be used to pay for products or services online. Thus it becomes an additional currency available on the Internet.

However, certain points differentiate it from other currencies:

  • Bitcoin has decentralized nature without any central authority as government or private companies.
  • Scarcity generated by artificial limit can cause only inflation, whereas traditional currencies are also subject to deflation.
  • All Bitcoin transactions are tracked and saved in the Bitcoin blockchain. The blockchain serves as a ledger that records every single move whereas cash transactions may not be recorded.
  • Just like taxes we pay to the government, Bitcoin transaction also requires fees. However, it is impossible to avoid paying a fee in case of a transaction registered in the blockchain.
  • Unlike cash transactions that are entirely anonymous, Bitcoin transactions are public.

5 Questions that Explain Everything About Bitcoin

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How Can You Acquire Bitcoin?

Buy Bitcoin

You can buy Bitcoin for local currency. For example, in the USA there is a company called Coinbase. It can sell you a Bitcoin by linking your credit card to your account. Apart from buying Bitcoin, there are other two effective ways to acquire them: mining or working for them.

Bitcoin Mining

Unlike the method mentioned above, Bitcoin mining is no longer as cost-effective as it used to be. An average user has to buy certain equipment, rent spaces and have money for associated costs such as electricity and cooling.

Work for Bitcoins

Just like cash currencies, bitcoins are used as payment for work. Before accepting this method, take into account that the price of Bitcoin is not stable and depends on the open-market bidding, similar to the stock prices that are determined by bidding.

How to Use Bitcoins?

You can connect your Bitcoin wallet with an address which serves as a destination just like an email address. However, Bitcoin addresses are alphanumeric and contain 27-34 characters in length. There are service providers that allow users create bitcoin addresses to send and get bitcoins.

If users want to send bitcoins, they simply need to maintain a positive balance in their wallets, know the receiver’s address and send the needed amount. There is an individual fee that miners usually include into a transaction. Transaction fees cover miners’ maintenance costs.

Bitcoin is not printed by any authority and, thus, creates its own rules. While traditional currency is printed by central banks that can produce more money to cover the national or external debt, Bitcoin is not subject to devaluating for this reason as they depend on “market forces” only.

Such transactions commonly take less than an hour to arrive. The waiting time depends on the bitcoin service provider and the amount of a fee. You can spend bitcoins wherever it is possible starting from online dating websites to cocktail bars around the world.

How it All Started?

The currency’s origins go back to 2008 when Bitcoin was first presented by its creator Satoshi Nakamoto, who had a secretly communicated via email. Before introducing the software to the world, Satoshi released the original rules of the Bitcoin network. Anyone could download and use this software.

The idea behind Bitcoin was to create a currency independent of any centralized authority, that could be transferred electronically and included low transaction fees.

Is This Currency Physically Printed?

Bitcoin is not printed by any authority and, thus, creates its own rules. While traditional currency is printed by central banks that can produce more money to cover the national or external debt, Bitcoin is not subject to devaluating for this reason as they depend on “market forces” only.

How Many People Are Using Bitcoin?

It is difficult to find out the exact number of people who use Bitcoin. However, there is one way that measures the number of bitcoin wallets. According to CoinDesk’s State of Bitcoin and Blockchain 2016 report, ”bitcoin wallets doubled to 12.77 million in one year, from the end of 2014 to the end of 2015.”

Considering that majority of people have more than one wallet, the number of bitcoin users is still rising. The number of bitcoin transactions also steadily increases.

Verdict

Blockchain is a revolutionary technology that stands behind Bitcoin. Having a method that prevents data from being erased or deleted is a positive thing. Moreover, it is an effective method to store information.

Bitcoin has had a good start in 2017, and more investors are interested in using this cryptocurrency. Essentially, Bitcoin can play off with good dividends and can be an attractive way to diversify your savings.

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