What is BITCOIN and how does it work?

INTRODUCTION – “The Internet of Money”

Bitcoin is a crypto-currency which provides a way to send money between point A & B with zero cost, with complete transparency without any clannishness. I used “internet of money” for defining Bitcoin because as in 1990s, internet was new for people & there were very few person who understood how it worked. The same applies here as I can hardly describe Bitcoin without using terms like Cryptography, crypto-currency. Similar to internet, nobody controls Bitcoin and everyone can take part. Bitcoin transactions are verified by Bitcoin miners which have an entire industry and Bitcoin cloud mining options.

Its uses are rapidly growing among people as Bill Gates said, “Bitcoin is technological tour de force”.

Bitcoin is an open source peer to peer payment system which was launched in 2009. At the moment, Bitcoin is used as a payment system by a lot of online shopping, gambling, web hosting websites as well as a few local stores and coffee shops in some countries. Bitcoin is an anonymous, oldest and adaptable crypto-currency means when we use Bitcoins to buy something, we directly exchange it with merchant without having to face any regulations. This also brings up a question of trust, but compared to PayPal it’s a risk you have to take to avoid bank issues and financial institutions.

It’s highly recommendable for gambling or mining to earn easy cash as it’s not widely acceptable so if you want to use it for payment on Amazon or local store, you will be in trouble. It basically lets you earn Bitcoins by running software on your computer to solve complicated mathematical problems. It may sound easy but it’s actually harder than mining for diamonds

WHAT IS CRYPTOCURRENCY & CRYPTOGRAPHY? – We have to understand the meaning of crypto-currency to get the idea of Bitcoin. Crypto-currency is a digital currency which is having a decentralized control and public ledger (such as Bitcoin’s block chain) which records transactions. Its classification can be performed as given below:

Convertible
- Centralized – Administrator, exchangers, users, third party ledger; it can be exchanged for edict currency such as Web Money, PayPal etc.
- Decentralized – Exchangers, users (no administrator), no trusted third Party ledger; It can be exchanged for edict currency such as Bitcoin.
Non-Convertible
- Centralized – Administrator, exchangers, users; third-party ledger; it cannot be exchanged for edict currency such as World of War craft Gold.
- Decentralized – Does not exist.

Crypto-currency is based on cryptography technique which enables secure communication in the presence of third parties (called adversaries); data confidentiality, data integrity, authentication, and non-repudiation are central to modern cryptography. Cryptography has many applications such as ATM cards, computer passwords, and e-commerce & used in many areas like:

Crypto-currency
Commitment schemes
Secure multiparty computations
Electronic voting
Authentication
Digital signatures
Crypto systems
Dining cryptographers protocol
Anonymous remailer
Pseudonymity
Anonymous internet banking
Onion routing
Secret sharing

First crypto-currency was Bitcoin appeared in early 2009, introduced by a shadowy figure known as Satoshi Nakamoto. After that many crypto-currencies have been introduced so far such as Litecoin, Peercoin, namecoin, novacoin and many more. Bitcoin transactions are divisible.

WHAT’S BITCOIN? – As I mentioned earlier, Bitcoin was the First crypto-currency introduced in 2009. Bitcoins are units of account composed of unique strings of numbers and letters that constitutes units of the currency and have value only because individual users are willing to pay for them and this is the reason of regular up-down in its value. It’s like sending a gold coin to another person over the internet. Bitcoins are digitally traded between users with a high degree of anonymity and can be exchanged into US dollars, Euros, and other edict currencies. Bitcoin users by country:

It’s not widely acceptable and if you think that when we will be able to expect our employer to pay us in bitcoins and then we can go to buy a beer in Bitcoin? I think we are still a couple of years off. But still many people around the world are using these coins because of their unique properties. Bitcoin is governed by math not by government and there is a maximum limit of 21 million that protects it from inflation.

“f your money.

Its value isn’t fixed, however currently 1Bitcoin = 17817.37 Indian rupees and 1Bitcoin = 279.92 US dollar and its market capitalization is 4,005,059,318 $.

Banks are aware that this is an area in which they will likely have to adapt or lose business so most of the major banks have criticized Bitcoin and refused to work with virtual-currency companies.

HOW IT WORKS? – Bitcoin doesn’t depend on payment card networks, banks, and government monetary authorities which makes it a key remittance platform for developing countries”. Bitcoin transactions are divisible and waste less energy. There is no middle man that further reduces the extra deduction of your money.

Its value isn’t fixed, however currently 1Bitcoin = 17817.37 Indian rupees and 1Bitcoin = 279.92 US dollar and its market capitalization is 4,005,059,318 $.

Banks are aware that this is an area in which they will likely have to adapt or lose business so most of the major banks have criticized Bitcoin and refused to work with virtual-currency companies.

HOW IT WORKS? –

A person gets started using Bitcoin by installing a virtual “wallet,” similar to an app, on a phone or by downloading software. Now your first Bitcoin address will be generated and you can create more whenever you need one. This address can be shared among your friends so that they can pay you or vice versa. You can also buy Bitcoin from websites by paying some extra transaction fee and use them wherever the payment in Bitcoin is allowed.

Building blocks of working –

Block chain – The entire Bitcoin network relies on this chain as it confirms all successful transactions. The integrity and the chronological order of the block chain enforcement are made with cryptography. It’s a shared public ledger which allows the spender to know its transaction details and left balance in his wallet.
Private keys – As transaction made by bitcoin are anonymous still Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof which authenticate the presence of user’s transaction & prevents alteration of transaction by anybody once it has been issued.
Mining – It’s a distributed unanimous system that is used for confirmation of pending transactions by including them in the block chain. It’s responsible for the enforcement of a chronological order in the block chain protecting the neutrality of the network, and allows different computers to agree on the state of the system. For confirmation, transactions must be packed in a block according to strict cryptographic rules & then verification will be performed by the network which prevents change in previous blocks as it would invalidate all following blocks. Mining also creates competitive lottery that stops any individual from easily adding new blocks consecutively in the chain. In this way, it gives protection from all illegal loopholes.

I’m listing out some Bitcoin wallet application:

Zebpay
Coinbase
Breadwallet
Block chain iPhone app
UNOcoin (popular in India)

WHAT ARE THE CHARACTERSTICS OF BITCOIN? –

Decentralization – Many people don’t own bank account in the world due to various reasons such as poverty, rules regulation, various transaction charges, travel distance, paper work. Bitcoin is decentralized virtual currency so there is no authority or set up like bank organization, it’s totally controlled by its users or miners of network & every machine that mines Bitcoin transactions makes up a part of the network. Thus it solves complete inefficiency of banking system which is a strong advantage of Bitcoin.
Easiness – Bank enforces many rules to their customers from time to time while Bitcoin set up is very easy & provides instant Bitcoin addresses without any fee.
Anonymity – A single miner can hold Bitcoin addresses as many as he wants as there will be no data fetched of their interconnections and his personal information.
Transparency – Bitcoin stores details of every single in the block chain which indicates publicly used bitcoin address, so anyone can tell how many bitcoins are stored at that particular address but at the same time it doesn’t.
Transaction Charges – Bank charges money for international transactions but Bitcoin doesn’t. Some platforms charges that is also for fast arrangement of your transactions.
Fast – Transaction are instantly successful as soon as Bitcoin network complete the transaction. There is no bank to slow down the process of your transaction, level outrageous fees, or freeze the transfer.
Global currency – When I use the ‘wallet’ term, you might think about fast growing Indian apps such as PayTM, Mobikwik but these wallets are limited in India only and having many drawbacks. Bitcoin is a global currency & can be used for flawless international transaction like PayPal.
Condemnation – They’re gone forever when you sent them, there’s no chance of getting them back, unless the recipient returns them to you.
Non-existence – Here’s the funny thing about bitcoins: they don’t exist anywhere, even on a hard drive. We think that we are having bitcoins, but when we look at a particular bitcoin address, there is no digital bitcoins held in it. We can’t assume it as physical object, or even a digital file, and say “this is a bitcoin” because there are only records of transactions between different addresses, with balances that increase and decrease.
Volatileness – Bitcoin’s price is unpredictable & it can increase or decrease drastically because its value totally depends on its miners. For example, On December, 2013 Bitcoin value decreased by over 50% after China’s Central Bank banned Chinese financial institutions from using Bitcoin while in January, 2014 price of a Bitcoin went up over one thousand dollar after the popular online game developer Zynga announced its’ plans for using it as a payment method. That’s why it’s used in gambling as there if you play well, you can be a Bitcoin millionaire in just a few weeks. However, it will only take a simple bump in the market to turn you from millionaire to penniless.
Safety – You are totally responsible for safety of your bitcoin wallets.

SUMMERY – Bitcoin is a digital currency for this digital world and open platform for transactions that is fully controlled and maintained by its users like Wikipedia. Currently there are many competitors of bitcoin and providing more features over this but as there is a saying “Old is Gold” , Bitcoin still attracts miners because Most of the new crypto-currencies are duplicates of existing crypto-currencies with minor changes and no novel technical developments. So if you are afraid of risks then Bitcoin isn’t your cup of tea and you can settle down with ordinary currency but if you want to earn easy money with this unpredictable crypto-currency then definitely go for it.