A Complete Guide on Bitcoin in 2018
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What is Bitcoin?
Bitcoin is an open software, released in the year 2009, and is considered as the world’s first Cryptocurrency and is nothing but a digital currency that only exists electronically.
Bitcoin is decentralized, there is no supreme power or central authority to control the circulation of bitcoin. but, this platform is far from anarchy.
The entire process is simple and perfectly organized – Bitcoin users can make transfers through peer-to-peer network. All these transactions are noted on Blockchain, its a huge ledger. This helps in recording each and every bitcoin transaction.
The blocks in Blockchain is developed using a data structure which is based on encrypted Merkle Trees. This helps in identifying fraud and corrupted files. When a single file is corrupted in a chain, Blockchain prevents the damage of rest of the files in that particular ledger.
Bitcoin’s Blockchain is responsible for handling how many bitcoins are generated and where are they developed, than relying on Governments for creating new currency. Also, it has a track of where bitcoins are and make sure all the transactions are effective and accurate.
As of now, the number of bitcoins generated is 17 million, and the supply of bitcoins is not controlled by any government, the meaning is the supply is controlled by the design itself.
In recent years bitcoin has generated a great deal of attention across the globe. This first decentralized digital currency that is solely present in the digital domain has grabbed many eyeballs with its super functionality.
It is the first peer-to-peer payment network that is powered by its users and is not directly governed by the laws that cover the traditional forms of currencies or the fiat currencies or the traditional payment channels.
As an innovative payment solution and as the pioneer of digital currency, bitcoins has ushered in a revolutionary system that is faster, cheaper and anonymous. Inspite of its uncertain future, bitcoin is an interesting phenomenon that is worth describing.
Bitcoin is a virtual currency that is meant to be a medium of exchange. This implies that there’s nothing physical about Bitcoin that you can touch and feel.
Bitcoins have no physical embodiment; they are only rows of transactions and balances. When you “own” Bitcoin it means you own the right to access the record of a specific bitcoin address in the public ledger or the blockchain and send funds from it to a different address.
All bitcoin transaction starting from its inception are verified and executed via the network of users who are the most integral part of the bitcoin system by using the blockchain technology which is also referred to as a distributed, public, virtual ledger that records every single bitcoin tansaction.
Bitcoin is the first cryptocurrency i.e. a virtual currency that is secured by the state of the art cryptography. Bitcoin robust yet easily accessible technological system opens up digital commerce to the global population especially to those who are deprived of any credible financial infrastructure.
It is to be noted that unlike the fiat currencies, there is a finite number of bitcoin that is available for use. For bitcoin, there will be only 21 millions of them.
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- Joyce Kim
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Bitcoin transaction properties?
As bitcoin aims to democratize technology with its incredible technological mechanism, let’s see the transaction properties that makes this pioneer of cyptocurrency such a viable means of exchange.
- Irreversible:Once the transaction is confirmed in the bitcoin network, it can‘t be reversed by anybody.
- Pseudonymous: Neither transactions or accounts reveal the real world identities. While it is usually possible to analyze the transaction flow, it is not necessarily possible to track the real world identity of users with those addresses.
- Fast and global: Transaction is instantly relayed across the bitcoin network and is confirmed within a couple of minutes. Since they happen across a global network of computers they are completely detached from your physical location.
- Secure:Bitcoin funds are secured in a public key cryptography system. Only the owner of the private key can transfer the bitcoin fund.
- Permission-less: You don‘t have to ask anybody for any kind of permission to transact with bitcoin. Being a user friendly software programme, everybody can download it for free. After you install it, you can receive and send Bitcoins as per your will and needs without the interference of any gatekeeper.
Who invented Bitcoin?
Bitcoin is the first established cryptocurrency that was created in 2009 by an anonymous individual or group, named Satoshi Nakamoto. The goal was to start a new electronic cash system which was decentralized and hence free from the control of a central authority or server.
The first details of how a bitcoin would work were described in a whitepaper published by Satoshi Nakamoto at an online cryptography forum in 2008. It was marked as a ‘peer to peer electronic cash transfer system’.
The white paper also successfully attempted to portray how the different parts of the bitcoin protocol will work and can be kept secure.
Other digital tokens or cryptocurrencies have imitated the basic idea of Bitcoin its blockchain to address perceived problems with new blockchains.
The first release of bitcoin was version 0.1 that was written by Satoshi Nakamoto. The hard coded genesis block is the very first block in the bitcoin blockchain. According to Satoshi anyone could download the source code and run it to join the bitcoin network.
Where can I find Bitcoin?
Bitcoin being a decentralized cryptocurrrency can’t be found in any places that deal with traditional money. Hence in order to procure your first bitcoins one should check out these four places that are listed below:
Cryptocurrency exchanges are best place to exchange your regular fiat currency for bitcoins. These exchanges are online places that accept payment in traditional money for the corresponding amount of bitcoin against it. Coinbase is one of the reputed cryptocurrency exchanges from where one can acquire his first bitcoins.
Next there are bitcoin ATMs at many places where you can exchange your fiat currency for corresponding amount of bitcoins via a money vending machine that is similar in function to a general ATM machine.
You can directly acquire bitcoins from person primarily from any classified community against regular cuurency. Here you are trading your bitcoin for cash.
One can also obtain bitcoin by selling any products or services for bitcoins.
How to buy Bitcoin?
The following five things are absolutely necessary to be sorted before buying bitcoins:
- Bitcoin address-this is a represented by a string of alpha numeric character that allows you to receive any bitcoin payment. This is known as ‘public key’. It is the address where the bitcoins are directed.
- Bitcoin wallet – it is a secure place like bank account to store the bitcoin that are obtained. But this wallet needs to be arranged before acquiring the bitcoins.
- Bitcoin exchange-it is the online cryptocurrency marketplace where cash can be exchanged for bitcoins
- Payment method-this includes debit or credit cards that will enable the payment while buying bitcoin
- Form of identity-it includes any valid identity document.
Now let’s take a look at the step by step guide to buy bitcoins:
- First step is to finalize a credible cryptocurrency exchange from where you intend to purchase bitcoins. Coinbase is one of the most reputed online sites for buying and selling cryptocurrencies.
- Before signing up you need to have a bitcoin wallet ready. These can be downloaded prior to the purchase or they are also provided by the exchange itself.
- Once you have the wallet, you have to pay for the corresponding amount of bitcoin at the exchange using traditional payment method such as credit card, bank transfer or debit card
- Once the payment is processed, the corresponding amount of bitcoins is transferred in the wallet.
One should always remember to transfer the bitcoins from the exchange’s wallet to more secure wallet because exchange wallets are vulnerable to hacks as they are not the primary services of the exchanges.
Technically speaking, the wallets, don’t store bitcoins instead they store the ‘private key’ that is similar to your bank account password that is guarded with ultimate security features.
Where can I store my Bitcoin?
Bitcoins are stored in special wallets that are somewhat similar to bank accounts that hold your funds. Before obtaining any bitcoin, you need a place or a wallet to store them.
Rather than actually holding your bitcoin, it holds the private key that allows you to access your bitcoin address (which is also your public key) so that you can transfer funds.
Well designed wallet software makes using bitcoin more convenient and intuitive. It usually holds several private keys.
Wallets can either be present on your computer and/or mobile device, on a physical storage gadget, or even on a piece of paper. Here we’ll briefly look at the different types.
Electronic wallet is either downloaded software, or is a secure space for the bitcoin address that is hosted in the cloud. The former is simply a formatted file that resides on your computer or device and facilitates transactions.
Cloud based wallets tend to have a more user-friendly interface, but you will have to trust a third party with your private keys.
On installing a wallet directly on your computer, you get the privilege to control your keys. Most of them have relatively easy configuration, and are free. The only major disadvantage is that they require frequent maintenance in the form of backups.
If your computer gets stolen or corrupted and your private keys are not also stored elsewhere other than the system, you lose your bitcoin.
They also require greater security features because if your computer is hacked and the hacker gets a hold of your private keys, he also gets hold of your bitcoin.
The Bitcoin Core protocol the original software wallet, the program that runs the bitcoin network..
Currently most of the wallets in use are “light” wallets or a SPV (Simplified Payment Verification) wallet, which doesn’t download the entire ledger but sync to the real thing.
Online (or cloud-based) wallets offer greater convenience than their counterpart for you can access your bitcoin from any device if you have the right passwords.
It is mostly free, easy to set up and come with desktop and mobile apps which make it easy to send and receive bitcoin.
With your private keys stored in the cloud, the disadvantage of online wallet lies in its vulnerable security feature as you have to trust the host’s security features, and that it won’t vanish with your money or close down and deny you access.
Mobile wallets are special apps for your smartphone to store bitcoins and are especially useful if you want to pay for something with bitcoin in shops, or if you want to transfer funds while on the move.
All the online wallets and most of the desktop ones mentioned above have mobile versions.
Hardware wallets are small physical devices that are intermittently connected to the web to enable bitcoin transactions.
They are the most secure as being generally offline, they are seldom hackable. But they do stand the chance of being stolen.
Paper wallets are the simplest of all the wallets; these are pieces of paper on which the private and public keys of a bitcoin address are printed stored safely for use when required.
They are ideal for the long-term storage of bitcoin. These wallets are more secure because being away from virtual attacks as they’re not connected to a network. They are, however, easier to lose especially from fire and water.
Many bitcoin investors use a hybrid approach while choosing wallets for their bitcoin funds. They hold a substantial amount of long term bitcoin fund offline, while storing the smaller liquidity in a mobile wallet account.
Your choice of wallet will depend on your bitcoin investment strategy, and your ease with technology
Whatever option you go for, one should be very cagey while dealing with the storage of bitcoins.
What is Bitcoin Mining?
The process of creating valid Bitcoin blocks which requires demonstrating proof of work is known as mining. Hence the miners are devices that mine or people who own those devices.
In reality, Bitcoin “miners” are computer programs that run on very specialized hardware that automates the process of securing the network. To sum up, the mining software
- Collects all the transactions in the network
- Validates them, and rejects the conflicting ones
- Packs them into large bundles called blocks
- Computes cryptographic hashes over and over again until if finds the suitable one
- Then submits the block to the network, appending it to the block chain and getting rewarded in return.
The mining process perhaps is the most radical innovation of the Bitcoin. In short, people and organizations can use computers to solve immensely complicated mathematical equations.
Upon solving the equation, a “block” is created and in exchange of which the miner is rewarded with a pre determined amount of bitcoin generated by the Bitcoin network.
Every four years the amount of the reward is reduced by half. This will eventually keep declining because the amount of bitcoin is limited.
With the rising popularity of bitcoin, the electricity costs and processing power requirements continues to increase.
Soon hardware experts are coming up with field-programmable gate-arrays (FPGAs) that are essentially custom built hardware created specifically for mining Bitcoins.
They feature ample power but consume low amounts of energy as compared to their predecessors.
However, FPGA’s are quickly becoming inadequate and eventually computer hardware companies began producing exclusive BitCoin mining specific chips that are known as ASICs
One of the most important functions of Bitcoin mining is that it assigns an actual value to the currency. Currently, most currencies are not backed by any gold or silver.
Not only that, but Central Banks can create new money at will. Most currencies only have value because we believe they do.
Bitcoin mining ensures that coins must actually be created through a process that requires effort and input, whereas Central Banks can simply print as much money as they want.
Why use Bitcoin?
Bitcoin is often considered as the future of the monetary system due to a variety of reasons, some of which are listed below.
It’s decentralized and restores the power back to the people. Introduced just a year after the 2008 financial crises, Bitcoin has attracted many proponents who found the current financial system as unsustainable.
It instilled some kind of confidence in the hearts of those who were very much sceptical about the government or the financial institutions.
Therefore it is not a matter of surprise that there is a huge community of enthusiasts who are actively building, buying, working and innovating in the cryptocurrency world.
The unique selling point of bitcoin is the concept that one could effortlessly carry out millions or billions of dollars of Bitcoin transaction across borders, pay for anything at any time, and don’t have to anxious about any bank related delay or impediment.
In case of bitcoins, personal information is left out of the transactions. As Bitcoin payments don’t necessarily need to be tied to one’s personal information, users aren’t exposed to any identity theft, which is a constant threat in case of traditional financial institutions. Bitcoin can also be backed up in special digital wallets and they are also encrypted to ensure the security of your funds.
Low Transaction Fees. Banks and companies like PayPal charge a good amount of money to send and receive money while bitcoin dismisses nearly 2.5% of “transaction fee” and replaces it with only a fraction of that.
The Immutable Ledger. Bitcoin’s blockchain which is its public ledger is completely objective. People have began to trust the technology and consider it to be fair because it is based on pure mathematics and computer science instead of being plagued by human error and corruption of questionable politicians.
How do Bitcoins work?
Bitcoin’s ruthless verification process is one of its most appealing features because it hugely minimizes the risk of fraud.
Since Bitcoin is a decentralized structure, volunteers—referred to as “miners”—constantly verify and update the blockchain that contains data related to each and every bitcoin transaction.
Once a specific amount of transaction is bundled up into a block and is verified, the block is appended to the blockchain and the transaction gets completed.
So what is “Mining”?
Instead of a single central server verifying every transaction, essentially every other computer in the network verifies each transaction.
Miners are presented with a complex mathematical problem. They compete against each other to solve the math problem first. The first one to present the solution adds the verified block of transactions to the ledger.
The completion of the mathematical problem is the proof that a minimum amount of energy was spent to get a correct answer. This process is known as Proof of Work.
Bitcoin mining is carried out by high end computer hardware and not by any human being. These machines create the blocks, add them to the blockchain and solve the complex crypto graphical problem generated by the system to complete the process of mining. The successful miners are duly compensated with a pre-decided amount of bitcoins.
As per the Bitcoin’s programming, the reward is designed to change over time, and the block reward becomes half about every four years. The current reward assigned to the miners for each new block of verified transactions is about 12.5 bitcoins.
The mining processes have become increasingly sophisticated with the outstanding technological advancement.
The most popular method uses ASICS–Application-Specific Integrated Circuits. ASICS are hardware systems similar to CPU computers that are built solely for mining bitcoins.
Bitcoin mining operations consumes a lot of effort and power thus it involves a lot of capital investment and the sheer amount of competition in the present scenario makes it difficult for newcomers to enter the race and make profit.
A new miner would not only need to have adequate computing power and expertise, but would also need the extensive amount of capital necessary to fund the operations.
Important Bitcoin Terms
Altcoins: All other cryptocurrencies except Bitcoin are altcoins.
Examples: Ethereum, Litecoin, Dogecoin, etc.
Bit: A sub-unit of bitcoinis called bit. 1 bitcoin (BTC) = 1,000,000 bits.
Note: You can always buy and sell using money that is less than one bitcoin.
Bitcoin: The term Bitcoin with a capital B represents the complete ecosystem of Bitcoin which includes the technology, the community, the protocol, and the software.
bitcoin: The term bitcoin with small b describes the unit of currency.
XBT and BTC: These are the common abbreviations for bitcoin.
Note: There isn’t much difference between these two abbreviations.
Confirmation: When a transaction happens in the bitcoin network, the blockchain confirms the transaction’s validity. The confirmation is done by “miners” which are computer hardware that carry out the complex processes.
Note: During this process, there might be multiple confirmations & you should wait for at least 2-3 confirmations before calling a transaction “successful”.
Mining: The process of computer hardware performing complex mathematical calculations for the Bitcoin network to confirm transaction and enhance the security of the system. Users who run these computers or rent resources for mining are called miner.
What are the pros and Cons of Bitcoins?
Bitcoin is the most popular and the first-ever introduced cryptocurrency which was created in 2009 as open source software by the pseudonym Satoshi Nakamoto.
It is a peer-to-peer version of electronic fund that allows online payments to be sent directly from one party to another without passing through any financial institution.
Although there are more than a thousand cryptocurrencies in use today, bitcoin is the most widely used cryptocurrency that is equivalent in some of the purpose of traditional, fiat currencies.
Let’s discuss the pros and cons of Bitcoin for better clarity about this medium of exchange.
Bitcoin has greater liquidity as compared to its peer
This unique feature allows users to retain their inherent value while converting bitcoin to fiat currencies like the US Dollar and Euro.
Bitcoin has full acceptance and popularity among the people
Hundreds of merchants have started accepting Bitcoin payments. People are getting more and more inclined towards Bitcoin more than the other cryptocurrencies.
Bitcoin makes virtual transactions easier than regular currencies
Bitcoin operates over the blockchain technology, which is decentralized in nature. There isn’t any transaction fees required nor does one have any red tape to navigate, as is the case with credit card payments, international money transfers and ATM cash withdrawals.
While most of the cryptocurrencies don’t have to face any kind of international red tapes, cross-border Bitcoin transactions are easier simply because it is more popular around the world.
Lower transaction fees
Compared to other third party virtual transaction mediums such as PayPal or credit card payments, Bitcoin comes with a minimal transaction fee. Though the fee is variable, seldom does a BTC transaction cost more than 1% of the value being transacted.
Bitcoin’s privacy and anonymity in relative to traditional currencies
When you spend your money using credit cards or any other online transaction medium, the private authorities or the banking authorities might track the records for any reference.
In case of Bitcoin transactions, the users will know the public address but they can’t actually identify the individual user.
Bitcoin doesn’t depend on creators or political agents
Since Bitcoin isn’t created by any state entity or any governmental organization, it is independent of any political interference.
Scarcity makes bitcoin more valuable. There are only 21 million bitcoins, out of which 17 million has already been mined. Hence bitcoin’s limited nature makes it more precious like scarce metals.
The major problem with Bitcoin is its transactions speed which is lower as compared to other cryptocurrencies like Ripple, Ethereum etc.
As of now, Bitcoin can process 6-7 transactions per second as compared to centralized payment networks like Visa which does 2000 transactions in a second.
Dark marketplaces are working towards tarnishing its image
Bitcoins remains as a lucrative medium for criminals to utilize funds for illegal activities in spite of high visibility prosecutions of the offenders. If such shady activities continue, the system might face marginalization.
Bitcoin is susceptible to price swings
Lately bitcoin price has been very volatile. Over a short period of time its value has risen exponentially.
Once the private key is lost, its lost forever
If you forget the wallet key, your entire money will be lost. By no means can you get it back. It is because the private key or the password only known to the wallet holder.
Furthermore its decentralized nature makes it impossible to arbitrate disputes between users and redress their grievances. Some cryptocurrencies like Ripple do have charge-back or refund function.
Bitcoin faces the challenge of being replaced by potential cryptocurrencies
Every now and then many cryptocurrencies are getting created with newer and advanced features. Some of them utilize the “smart contract” systems to make the providers accountable for their promises.
Every cryptocurrency comes with its own pros and cons. But that doesn’t dent their potential. As the experts have predicted, the cryptocurrency market is going to take over pretty soon.
The market is presently dominated by ‘Bitcoin’ whose impact is way higher than its peers. Whenever it comes to investment, there is clearly a certain amount of risk associated with it even though they are heralded as the most revolutionary payment solutions.
What is Bitcoin Fork?
Lately a lot of talks are going on around the bitcoin fork which is a technical event that occurs when diverse participants in the bitcoin network fail to agree on common rules.
At the basic level, a fork occurs when a blockchain diverges into two potentially sustainable paths-one that relates to the networks transaction history and the other that decides on new rules in deciding what makes a transaction valid. Those who use bitcoin have to show support for one or the other choice.
A fork is a technical term that is used by developers working on open source projects. It basically refers to a “software update”.
Hence every time you update a program on your phone or computer you fork out from the older version. Bitcoin has introduced two new fork concepts:
Hard fork – Hard fork refers to a mandatory software update that conflicts with the older version. The bitcoin program won’t run if you don’t update it.
For example, when a critical bug is found in the system that allows people to exploit the software, everyone is required to update their program in order to continue using it. If you don’t update it, you can’t use the program. Also, a hard fork once created can’t be reversed.
Soft fork – A soft fork refers to the software update that doesn’t conflict with the existing software. Moreover it isn’t mandatory and allows the network to accept the new features implemented on the go.
While a soft fork is occurs, even computers running the old program will still be able to use the program without any hindrance. If the soft fork doesn’t work out, has bugs or people don’t adopt it – it’s can be completely reversed and you can go back to the older version
Most programs you use today are controlled by a single entity. So whenever they want to “fork” from their original program they issue an update in the form of a soft fork which if not updated might not work.
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