Bitcoin is a new digital currency across the globe, picking up very fast through its journey. Many countries have made it legal to use bitcoins for payments. You’ve likely to be heard of bitcoin, the digital currency that’s recently coming into the spotlight. Let us understand what is bitcoins and how to use them.
Bitcoin is a digital currency that works on a peer-to-peer basis. It was invented somewhere in the year 2008 by an unknown programmer, or a group of programmers, under the name – Satoshi Nakamoto. It is designed for secure financial transactions taking place between users directly, without an intermediary which means no central authority, no banks, and no government regulators. People who bought bitcoins in the early stages have now become millionaires and authorities seized millions of dollars worth of Bitcoins from the Web’s notorious black market, the Silk Road. There have been huge efforts made to uncover the identity of Bitcoin creators.
Bitcoin would keep the transactions and the transacting parties anonymous and keep the transactions very secure, and even eliminate middlemen fees. This means that it is decentralized and has no central authority controlling it. Like currency notes, it can be sent from one person to another, but without a central bank or the government attempting to track it.
While no one authority controls the generation of the coins or tracks them, the system itself is designed in such a way that the network maintains a foolproof system for keeping the record of every transaction as well as tracking issuance of the currency. These transactions are recorded in the publically distributed ledger called the blockchain.
It is really important to understand how the bitcoins actually work. You can send bitcoins digitally to anyone who has a bitcoin address anywhere in the globe. One person could have multiple addresses for different purposes – personal, business and the like. To put it in simple words, Bitcoin is the Internet’s version of money.
Bitcoin is at its core a cryptographic protocol, which is why it is also referred to as a “crypto-currency.” The protocol creates unique pieces of digital property that can be transferred from one person to another. The protocol also makes it impossible to double-spend a Bitcoin, meaning you can’t spend the same Bitcoin twice. Each Bitcoin is based on a cryptographic logic having a public address and a private key, which are long strings of numbers and letters that give each bitcoin a specific identity.
In addition to having a unique digital footprint, Bitcoins are also having all the transactions recorded in a public ledger of all Bitcoin transactions known as the blockchain. Buying or spending a Bitcoin records your purchase publicly and permanently. The blockchain is maintained by a distributed network of computers around the world. This decentralization means no one entity, such as a government, controls it. Transactions happen digitally from person to person, without middlemen such as banks or clearinghouses.
To buy and sell Bitcoins through online exchanges, the public address and private keys are both required to trade, sell, and spend Bitcoin. Since transactions are done using the public keys, the identities of the buyers and sellers are veiled to each other and to the public, even though the transaction is recorded publicly in the ledger.
Bitcoin can either be used to buy things online from merchants. Few organizations have started accepting Bitcoins as well. It can also be cashed out through an exchange, broker, or direct buyer. The Bitcoin receivers get to spend them within minutes of receiving these coins. Once spent, you cannot get them back unless the receiver decides to give them to you. A bitcoin is not a printed currency although there are limited bitcoins in the market.
Bitcoins are available in bitcoin exchange houses. You can also purchase bitcoins from other bitcoin users. You can also become a bitcoin miner by investing in software and hardware. More the power of the hardware that helps with encryption technology, higher the probability of your earning bitcoins.
Unocoin is one of the Bengaluru-based company that allows users to buy, sell, store or uses bitcoins. While bitcoin usage is not common, there are said to be more than 500 merchants who accept bitcoins for payment in India. With paper currency, the government decides when and how much cash to print and distribute throughout the nation. They have the control on the quantity to be released in the market. In comparison, Bitcoin doesn’t depend on any central bank or authority. The people create Bitcoins through mining process.
Mining is a process of solving complex math problems, which are commonly known as “hashing”, using computers running Bitcoin software. The mining process requires more specialized computing power than regular PCs. You need to buy specialized Bitcoin machines or form groups that chain multiple computers together to perform mining process. When the program solves one of these math problems, it creates “blocks,” or encrypted Bitcoin transactions. When one of these block is solved, you are rewarded with Bitcoins.
These cryptographic puzzles get increasingly harder as more Bitcoins enter circulation. Also, the rewards are cut in half at regular intervals. In other words, there’s a gradual slow-down in the rate at which new Bitcoins enter circulation. There is a built-in limit of 21 million Bitcoins, meaning when this many have been mined, production will stop completely.
The blocks created by mining make up the transaction record of the Bitcoin system. Every block contains a hash of the previous block, which creates a transaction database, blockchain. A new block is added to the blockchain on an average of once every ten minutes. Rather than being maintained by a central body, it is distributed across all the mining computers. The difficulty level of solving the problem is high enough to ensure that it takes the time to do it. Even if you become a bitcoin miner, there is no guarantee that you would be able to mine a certain number of bitcoins. Any scheme related to bitcoins promising a fixed return is likely to be a lie.
After understanding how bitcoins are created and how they work, let us now see how can you buy the bitcoins. People commonly buy and sell Bitcoins through exchanges, though this isn’t necessary. In order to make transactions on an exchange, you must have a Bitcoin wallet to keep your currency in.
As bitcoin exchange is not regulated by any authority, so be careful while putting your trust and money. Once you have settled on a broker or exchange, you create an account with a username and password and link it to your bank account. Once the account is created, you can begin the buying process using bitcoins.
Coinbase and Bitstamp are few of the exchanges which make it pretty easy for the end user to buy Bitcoins, exchanging real-world money from your bank for the virtual currency, or vice versa. For first time buyers, there is usually a delay of a couple of days to a week for orders to go through. When you want to sell, you make sure your wallet is loaded with your Bitcoins, and pretty much all you have to do is click “sell.” Similar to any other online wallet.
Every Bitcoin has a private, unique, and long numerical ID which allows you to transact offline. If you write this key down or store it on a local drive, you can trade a Bitcoin simply by passing that key off to someone else also. This approach can actually be faster than going through a centralized exchange.
A relatively new method is a Bitcoin ATM, which is coming into existence. The first bitcoin ATM machine was opened at a coffee shop in Vancouver, Canada, in October 2013. It lets you buy, sell, and trade Bitcoin in exchange for cash and checks in 60 different currencies.
The maximum cap on the generation of bitcoins is 21 million, out of which approximately 16 million is already in existence. It is estimated that approximately 5 million bitcoins can be mined now onwards, till around 2140. One bitcoin is worth roughly around $1815 as on May 2017. An early investor once quoted on the Web saying that by 2030, the value could be as high as $500,000. One of the reasons that could prompt you to buy a bitcoin today is not so much to use it for payment online but as an investment.
As per a news report published in August 2015, “India has around 50,000 bitcoin enthusiasts, with 30,000 of them actually owning the currency.” While the figures would be slightly higher now, India still isn’t a significant participant in the virtual currency revolution, but its potential can’t be challenged.
Recently, the biggest challenge faced by many organizations was the ransomware attack where the attackers are demanding Bitcoins in return for sharing the key to restore the company’s computer systems, which were hacked and locked. India’s biggest Bitcoin trading platform, BuySellBitCo.in, has suspended its operations, citing a recent Reserve Bank of India public advisory that highlighted the risks involved in dealing with virtual currencies. It has relaunched as Zebpay in the market.
Bitcoin and other virtual currencies have begun to gain widespread acceptance in India, despite poor Internet penetration and lack of necessary laws to backup. The central bank had issued a notice on the risks involved and added that it could be used for money laundering and funding terrorism activities.
The Transactions are currently quite difficult to trace, however, which is why Bitcoin has been associated with the illicit activity, such as buying and selling drugs on the now-defunct Silk Road market.