Getting to Know Bitcoin
Get to know the famous cryptocurrency - bitcoin
Author:James PierceReviewer:Camilo WoodFeb 18, 2021252 Shares251.9K Views
Bitcoin is a revolutionary network for payments and a new kind of money. Bitcoin uses peer-to-peer technology to function with no central authority or banks; the network is collectively responsible for handling transactions and issuing bitcoins. Bitcoin is open-source; its architecture is public, Bitcoin is owned or regulated by nobody and everybody can participate.
Bitcoin is the first implementation of a concept called "cryptocurrency", which was first described in 1998 by Wei Dai on the cypherpunks mailing list, suggesting the idea of a new form of money that uses cryptography to control its creation and transactions, rather than a central authority.
Creation Of Bitcoin And Who Controls It
The first Bitcoin specification and proof of concept were published in 2009 in a cryptography mailing list by Satoshi Nakamoto. Satoshi left the project in late 2010 without revealing much about himself. The community has since grown exponentially with many developers working on Bitcoin.
Satoshi’s anonymity often raised unjustified concerns, many of which are linked to misunderstanding of the open-source nature of Bitcoin. The Bitcoin protocol and software are published openly and any developer around the world can review the code or make their own modified version of the Bitcoin software. Just like current developers, Satoshi’s influence was limited to the changes he made being adopted by others and therefore he did not control Bitcoin. As such, the identity of Bitcoin’s inventor is probably as relevant today as the identity of the person who invented paper.
Much like no one owns the technology behind email, nobody owns the Bitcoin network. Both Bitcoin users around the world control Bitcoin. Although developers are improving the software since all users are free to choose what software and version they use, they will not force a change in the Bitcoin protocol. In order to stay compatible with each other, all users need to use software complying with the same rules. Bitcoin can only work correctly with a complete consensus among all users. Therefore, all users and developers have a strong incentive to protect this consensus.
How Bitcoin Works
From a user perspective, Bitcoin is nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive bitcoins with them. This is how Bitcoin works for most users.
A public ledger called the "blockchain" is exchanged behind the scenes by the Bitcoin network. Each transaction ever processed is included in this ledger, allowing a user's machine to check the legitimacy of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own Bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. This is often called "mining". To learn more about Bitcoin, you can consult the dedicated page and the original paper.
Bitcoin Used By People
Is Bitcoin really used by people? Yes! There is a growing number of businesses and individuals using Bitcoin. This includes brick and mortar businesses like restaurants, apartments, law firms, and popular online services such as Namecheap, WordPress, and Reddit. While Bitcoin remains a relatively new phenomenon, it is growing fast. At the end of August 2013, the value of all bitcoins in circulation exceeded US$ 1.5 billion with millions of dollars worth of bitcoins exchanged daily.
While it may be possible to find individuals who wish to sell bitcoins in exchange for a credit card or PayPal payment, most exchanges do not allow funding via these payment methods. This is due to cases where someone buys bitcoins with PayPal and then reverses their half of the transaction. This is commonly referred to as a chargeback.
People Acquire Bitcoin Through The Following:
- As payment for goods or services.
- Purchase bitcoins at a Bitcoin exchange.
- Exchange bitcoins with someone near you.
- Earn bitcoins through competitive mining.
Bitcoin payments are easier to make than debit or credit card purchases and can be received without a merchant account. Payments are made from a wallet application, either on your computer or smartphone, by entering the recipient’s address, the payment amount, and pressing send. To make it easier to enter a recipient’s address, many Bitcoin wallets can obtain the address by scanning a QR code or touching two phones together with NFC technology.
Advantages And Disadvantages Of Bitcoin
Advantages
- Payment freedom - It is possible to send and receive any amount of money instantly anywhere in the world at any time. No bank holidays. No borders. No imposed limits. Bitcoin allows its users to be in full control of their money.
- Very low fees - Bitcoin payments are currently processed with either no fees or extremely small fees. Users may include fees with transactions to receive priority processing, which results in faster confirmation of transactions by the network. Additionally, merchant processors exist to assist merchants in processing transactions, converting bitcoins to fiat currency, and depositing funds directly into merchants’ bank accounts daily. As these services are based on Bitcoin, they can be offered for much lower fees than with PayPal or credit card networks.
- Fewer risks for merchants - Bitcoin transactions are secure, irreversible, and do not contain customers' sensitive or personal information. This protects merchants from losses caused by fraud or fraudulent chargebacks, and there is no need for PCI compliance. Merchants can easily expand to new markets where either credit cards are not available or fraud rates are unacceptably high. The net results are lower fees, larger markets, and fewer administrative costs.
- Security and control - Bitcoin users are in full control of their transactions; it is impossible for merchants to force unwanted or unnoticed charges as can happen with other payment methods. Bitcoin payments can be made without personal information tied to the transaction. This offers strong protection against identity theft. Bitcoin users can also protect their money with backup and encryption.
- Transparent and neutral - All information concerning the Bitcoin money supply itself is readily available on the blockchain for anybody to verify and use in real-time. No individual or organization can control or manipulate the Bitcoin protocol because it is cryptographically secure. This allows the core of Bitcoin to be trusted for being completely neutral, transparent, and predictable.
Disadvantages
- Degree of acceptance - Many people are still unaware of Bitcoin. Every day, more businesses accept bitcoins because they want the advantages of doing so, but the list remains small and still needs to grow in order to benefit from network effects.
- Volatility - The total value of bitcoins in circulation and the number of businesses using Bitcoin are still very small compared to what they could be. Therefore, relatively small events, trades, or business activities can significantly affect the price. In theory, this volatility will decrease as Bitcoin markets and the technology matures. Never before has the world seen a start-up currency, so it is truly difficult (and exciting) to imagine how it will play out.
- Ongoing development - Bitcoin software is still in beta with many incomplete features in active development. New tools, features, and services are being developed to make Bitcoin more secure and accessible to the masses. Some of these are still not ready for everyone. Most Bitcoin businesses are new and still offer no insurance. In general, Bitcoin is still in the process of maturing.
More Information About Bitcoin
Why People Trust Bitcoin?
Much of the trust in Bitcoin comes from the fact that it requires no trust at all. Bitcoin is fully open-source and decentralized. This means that anyone has access to the entire source code at any time. Any developer in the world can therefore verify exactly how Bitcoin works. All transactions and bitcoins issued into existence can be transparently consulted in real-time by anyone. All payments can be made without reliance on a third-party and the whole system is protected by heavily peer-reviewed cryptographic algorithms like those used for online banking. No organization or individual can control Bitcoin, and the network remains secure even if not all of its users can be trusted.
Is Bitcoin Fully Virtual And Immaterial?
Bitcoin is as virtual as the credit cards and online banking networks people use every day. Bitcoin can be used to pay online and in physical stores just like any other form of money. Bitcoins can also be exchanged in physical form such as the Casascius coins, but paying with a mobile phone usually remains more convenient. Bitcoin balances are stored in a large distributed network, and they cannot be fraudulently altered by anybody. In other words, Bitcoin users have exclusive control over their funds and bitcoins cannot vanish just because they are virtual.
Is Bitcoin Anonymous?
Bitcoin is designed to allow its users to send and receive payments with an acceptable level of privacy as well as any other form of money. However, Bitcoin is not anonymous and cannot offer the same level of privacy as cash. The use of Bitcoin leaves extensive public records. Various mechanisms exist to protect users’ privacy, and more are in development. However, there is still work to be done before these features are used correctly by most Bitcoin users.
Some concerns have been raised that private transactions could be used for illegal purposes with Bitcoin. However, it is worth noting that Bitcoin will undoubtedly be subjected to similar regulations that are already in place inside existing financial systems. Bitcoin cannot be more anonymous than cash and it is not likely to prevent criminal investigations from being conducted. Additionally, Bitcoin is also designed to prevent a large range of financial crimes.
What Happens When Bitcoins Are Lost?
When a user loses his wallet, it has the effect of removing money out of circulation. Lost bitcoins still remain in the blockchain just like any other bitcoins. However, lost bitcoins remain dormant forever because there is no way for anybody to find the private key(s) that would allow them to be spent again. Because of the law of supply and demand, when fewer bitcoins are available, the ones that are left will be in higher demand and increase in value to compensate.
What About Bitcoin And Consumer Protection?
Bitcoin is freeing people to transact on their own terms. Each user can send and receive payments in a similar way to cash but they can also take part in more complex contracts. Multiple signatures allow a transaction to be accepted by the network only if a certain number of a defined group of persons agree to sign the transaction. This allows innovative dispute mediation services to be developed in the future. Such services could allow a third party to approve or reject a transaction in case of disagreement between the other parties without having control over their money. As opposed to cash and other payment methods, Bitcoin always leaves public proof that a transaction did take place, which can potentially be used in a recourse against businesses with fraudulent practices.
It is also worth noting that while merchants usually depend on their public reputation to remain in business and pay their employees, they don’t have access to the same level of information when dealing with new consumers. The way Bitcoin works allow both individuals and businesses to be protected against fraudulent chargebacks while giving the choice to the consumer to ask for more protection when they are not willing to trust a particular merchant.
How Are Bitcoins Created?
New bitcoins are generated by a competitive and decentralized process called "mining". This process involves that individuals are rewarded by the network for their services. Bitcoin miners are processing transactions and securing the network using specialized hardware and are collecting new bitcoins in exchange.
The Bitcoin protocol is designed in such a way that new bitcoins are created at a fixed rate. This makes Bitcoin mining a very competitive business. When more miners join the network, it becomes increasingly difficult to make a profit, and miners must seek efficiency to cut their operating costs. No central authority or developer has any power to control or manipulate the system to increase their profits. Every Bitcoin node in the world will reject anything that does not comply with the rules it expects the system to follow.
Bitcoins are created at a decreasing and predictable rate. The number of new bitcoins created each year is automatically halved over time until bitcoin issuance halts completely with a total of 21 million bitcoins in existence. At this point, Bitcoin miners will probably be supported exclusively by numerous small transaction fees.
What Determines Bitcoin’s Price?
The price of a bitcoin is determined by supply and demand. When demand for bitcoins increases, the Bitcoin price increases, and when demand falls, the price falls. There is only a limited number of bitcoins in circulation and new bitcoins are created at a predictable and decreasing rate, which means that demand must follow this level of inflation to keep the price stable. Because Bitcoin is still a relatively small market compared to what it could be, it doesn’t take significant amounts of money to move the market price up or down, and thus the price of a bitcoin is still very volatile.
James Pierce
Author
Camilo Wood
Reviewer
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