Bitcoin is a cryptocurrency or software that forms a decentralized, peer-to-peer, worldwide payment system, without the control of any centralized authority. The blockchain software resides on thousands of computers, all over the world and is maintained by a mix of ordinary people and more sophisticated computer experts, collectively known as ‘miners’. Bitcoins are transferred via a peer-to-peer network between individuals, with no middleman bank to take a slice.
At present, most investors are not really using it as a currency to make payments, but they’re using it as a speculative investment or ‘digital asset’, with the hope to turn it into profit.
The unit of account in this system is called ‘Bitcoin’. A ‘Satoshi’ (named after its creator) is the smallest amount within bitcoin, representing 0.00000001 bitcoin, i.e. divisible down to 8 decimal points. A ‘Millibitcoin’ equals 0.001 bitcoin or 100,000 satoshis.
Japan and Australia are two countries that have officially accepted bitcoin as a legal currency.
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Advent of Bitcoin System
For the first time a domain name, named bitcoin.org registered on 18 August 2008. In January 2009, the bitcoin network came into existence using the pseudonym ‘Satoshi Nakamoto’.
However, despite many speculations, it is not known who that was, and interestingly, that person or group does not have control over the bitcoin network today.
According to Satoshi’s blueprint, the total supply of bitcoin will be capped at about 21 million coins. Of the 21 million in bitcoin due to be mined, about 16.74 million, or roughly 80%, are in circulation.
In the past, most bitcoin cryptocurrency trading was made in the west, but nowadays the leader share is China (and traded versus the Chinese Yuan).
According to website bitinfocharts.com, in 2017 existed 9,272 bitcoin wallets with more than $1 million worth of bitcoins.
Running of Bitcoin Cryptocurrency Operations
The bitcoin network runs on a software system named ‘blockchain’. The blockchain software can store and send anything of value, so there are companies using it to store documents like property deeds, etc.
In fact, nowadays blockchain as a technology is becoming very popular among banks and other large financial institutions, who want to use it to settle payments on their back-end systems.
The bitcoin blockchain is a public, decentralized ledger (no central party or institution is in charge) that records every single bitcoin transaction. Think of it like a library card in the cloud (not the card you used to take out a book, but the slip inside a book that lists all the borrowers).
Hence, we can describe blockchain as an unchallengeable digital “ledger.”
Creation of New Bitcoins
Nowadays the blockchain software takes place on thousands of computers all over the world and is maintained by ordinary people and more sophisticated computer experts called ‘miners’.
These miners use fast and expensive computers to find and mine the blocks. Codes running on their powerful machines create bitcoins by solving complex mathematical computations, but during this process, they also generate a great deal of heat.
The world’s largest producer of bitcoin mining equipment is Bitmain, based in China.
It may interest to know that Bitman consumes about 1400 Watts per hour, similar to an average space heater.
Presently, 16.7 million bitcoins have been created. A fractional amount of new bitcoins gets created every time a miner puts a block to the blockchain which is a reward for mining.
Recording of Bitcoin Transactions
All bitcoin transactions are permanently recorded by miners, who upload bundles of transactions, or “blocks,” to the chain, maintained on all those computers. After that miners receive a small amount of bitcoin as an incentive for mining.
These miners continuously keep the blockchain consistent, complete and unalterable by repeatedly verifying and collecting newly broadcast transactions into a new ‘block’.
A complex algorithm links it within the blockchain to the previous block through a system called proof-of-work (described ahead).
At the end blocks of transactions pass a process of validation on the blockchain network through computing “consensus,” which is a feature of the software.
Procedure to Buy and Transact in Bitcoins
If you want to buy bitcoin currency, the first step is to download some bitcoin wallet, which is a digital wallet that doesn’t hold actual coins (since bitcoins are intangible) or even hold any files.
The bitcoin wallet stores (mainly for security purposes) your ‘private keys’, which are strings of numbers and letters that allow you to access your coins. A bitcoin key looks like this: 05GL56JDK45sv754HR7ac.
Next step will be to register with a bitcoin brokerage agency, like the ‘Coinbase’. While registering with the brokerage agency, it makes you answer several security questions to get set up with an account.
Once the account is approved by the agency, you can buy bitcoins using money transferred from a bank account and sometimes by charging a credit card.
What you are buying is a ‘bitcoin key’, as described above. You can transfer this asset to others for whatever the market price of bitcoin is, minus transaction fees.
Last, to make transactions, you can visit any bitcoin exchange site and sell bitcoins, from your wallet, by entering your key.
We can convert bitcoin into ordinary currency based on its value on that date, or even we can use this crypto-currency to make purchases from sellers that accept bitcoin cryptocurrency.
Safety & Security Feature
To process new transactions in bitcoin cryptocurrency, the miners using fast and expensive computers solve complex mathematical problems that add the transactions in a block to the blockchain. We call this “proof of work” and is one of the core features of most crypto-currencies.
It requires multiple miners to verify the work through the process of computing “consensus,” which prevents fraud in bitcoin transactions.
Besides, some brokerage agencies like Coinbase will ask to provide personal information of anyone who wants to buy or sell bitcoin on their exchange. In case of the law-enforcement agencies demand, the exchange will have to provide the info under the same laws that govern banks or brokerages.
The bitcoin blockchain by itself is considered as very secure, but you must be very careful because the bitcoin currency can be stolen from some account by stealing log-on and password info, i.e. ‘private key’ of the account holder and after that, the bitcoin can be sent to another account that is controlled by the thief. Once bitcoin is transferred, it can’t be recovered.
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Implications of Meteoric Rise of Bitcoin Cryptocurrency
- The trend over the previous few years has made bitcoin a good long-term investment that has a long shelf life and whose value goes up over time.
- Bitcoin is being considered as a genuine innovation that will be around for a long time and help transform money.
- Governments across the world have already stepped in, to regulate trading in bitcoin, so it can become a more established part of the financial system. Hence, it will legitimize the currency and broaden its adoption for investors.
- Some financial experts see the recent surge in the bitcoin market as a bubble that may burst. But because the bitcoin market cap is tiny, even if it crashed, it would not have a significant impact on the broader financial markets.
- In recent weeks it has been seen that the global stock market rally has slowed down, but bitcoin has continued to surge higher, which is luring more and more investors to invest in this market.
- Slowly bitcoin as a currency is catching on among some retailers, mostly e-commerce: US companies like Overstock accepts bitcoin, as does Microsoft’s Xbox Store, and PayPal and Square allow merchants to accept bitcoin.
- The retailers might even encourage customers to pay in bitcoin in the future if it costs them less in transaction fees than credit cards do.
- Since we cannot trace bitcoin transfers, bitcoin is often used to purchase drugs or stolen goods or finance other types of criminal activity.
- It can become a major source for terror funding across the globe.
- We believe it that 40% of the bitcoin is owned by just 1000 people and hence powerful people or ‘whales’ could collude to influence the price of bitcoin.
- Since there are relatively few buyers and sellers of bitcoin, this market is likely to remain volatility and the ‘whales’ could easily push the price around.
- There is a risk that the demand for bitcoin may go down sending its price plummeting. It can happen because of any unforeseen circumstances like a technical problem, regulatory interference, bad publicity arising from the massive amount of electrical power needed to mine for bitcoin, etc.
- Bitcoin offers both anonymity and the security of an electronic transaction. Hence, bitcoin can become a substantial gray or black market or a sub-economy where people could hide their income and evade government taxes.
- Bitcoin is not as liquid as other investments, firstly because settlement can take more than a week, and second, amid panic selling, some bitcoin holders might not sell for a fairly long time, resulting in steep losses.
Bitcoin as a cryptocurrency is gaining huge popularity. In fact, on 03 March 2017, the price of a bitcoin had surpassed the market value of an ounce of gold for the first time as its price surged to an all-time high of $1,268.
However, big banks, brokers and financial institutions for security reasons have warned their clients that bitcoin currency should not be ushered in hurriedly without adequate transparency, regulatory mechanism, and risk assessment.