Table of Contents
Bitcoin is a digital currency or digital cash which eliminates the traditional way of doing financial transactions through banks and financial institutions.
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It is like a digital version of cash to buy products and services. Currently, the use of Bitcoins is very limited. Many countries have completely banned the use of bitcoins. While, even in countries where bitcoin is legal, very few shops accept it as a currency to exchange.
Bitcoin is like a virtual currency described as cryptocurrency. A bitcoin does not hold any value without encoded private codes.
There is no transaction fee, transaction delays attach to it. It is a free moving digital currency.
In India, Bitcoin has started gaining popularity due to government initiative for cashless tractions, but it is still accepted by a fraction of people. Currently, there is no defined institution like RBI to regulate its functioning. Neither it is administered centrally or by any institute defined by the government.
Also, the daily tractions between the various parties and individuals are managed by the technology called blockchain which is a public ledger for all transactions.
| Let us understand the transaction using Bitcoin with an example: Mr A is feeling hungry and he decides to order a pizza. He places his order to Mr B who owns a pizza shop in the local market. Mr A uses Bitcoin as his mode for making the payment. He sends the required Bitcoins digitally to Mr B’s account and signs the transactions with his private key to verify the transaction. After the transaction is verified by the miners, the required Bitcoins is sent to B’s account. And Mr A’s transaction is also broadcast on all the other network participants which are known as nodes on the bitcoin blockchain. Once, the bitcoin is processed after all the technical and business rules checks, Mr B gets a score, whether to process Mr A’s demand or not. Now, Mr B can unlock his account using his private key if he wishes to use his Bitcoin account. |
History of Bitcoin
Interestingly, nobody knows the exact origin. But it is said that Bitcoin was created in 2019 under the pseudonym Satoshi Nakamoto (nobody knows the real name). This could be just one individual or group of people; nobody knows anything about it.
Some guess it is originated from Japan due to its last name Nakamoto, while some feel it is from an English speaking country due to Satoshi’s mastery over English. He/They also published a white paper on Bitcoin.
The technology used in Bitcoin was not something new. These technologies were already there in the market for example chain of block technology invented by Stuart Haber and W. Scott for timestamping documents.
Also, it is said that the creator of Bitcoin got the inspirations from earlier digital cash systems in the market, though none of them became as popular as Bitcoin.
DigiCash – This technology was founded by David Chaum, cryptographer and computer scientist. He made DigiCash as a privacy-oriented Solution. The company went bankrupt and the was the entire model was trashed.
B-Money – This was introduced by computer engineer Wei Dai. In B-money, it is proposed as proof of work system, like a distribution database where people can sign as proof. This technology also never took off.
Bit Gold – Computer scientist, Nick Szabo introduced this technology. In Bit Gold, ledgers that would record the data were maintained as a proof of work operation. There is a lot of similarities seen between Bit Gold and Bitcoin, and there are also theories about Bit Gold being the precursor of Bitcoin.
In short, we can say that Bitcoin was not the original idea of the inventor. The technology was inspired by other digital cashless systems invented in the market. But Bitcoin technology became the most successful and acceptable among the people.
How does Bitcoin Work?
The part which most of people want to know. How whole this concept of Bitcoins exactly works?
Before we move into the process. Let us first understand the terms used in Bitcoins. So that it becomes easier to understand its actual working. Know more with our Bitcoin Course.
BTC or XBT
This is the trading symbol used in Bitcoin.
Blockchain
The transactions are known as a block which is chained to a code. This way a permanent record a created of each transaction which is available on the public ledger known as Blockchain.
Private and public keys
Every bitcoin wallet has both a public and a private key. Both the keys are required for making transactions and digital signature. These keys together provide proof of authorization of transactions.
Wallet
Place where Bitcoins are stored like a cloud
Bitcoin miners
Bitcoin miners are basically members of the peer-to-peer platform. The members of these platforms individually/independently confirm the transactions taking place (within 10-20 minutes). These members/miners are paid in bitcoins for their efforts.
The entire Bitcoin function depends upon two mechanisms.
Blockchain
A blockchain is a shared ledger which contains all the transactions and is accessible to everyone.
The transactions are grouped as blocks which are then coded/cryptographically secured during mining and are linked to each other.
Mining
Mining is a process in which each block has to be secured with a code.
The miners/ members of the peer group carry out this process of grouping and coding the blocks by solving complex algorithms. The miners in return get rewarded with bitcoins (known as block reward)
Mining is a continuous process.
Once the transactions are cryptographed, these tokens known as bitcoins can be easily exchanged in the market for purchasing/selling goods and services.
| Let us summarize: Bitcoin is technically an encrypted computer file (known as Bitcoins) stored in a digital wallet People can easily exchange these Bitcoins for goods and services. All transactions are recorded in public forum known as blockchain |
Where can one buy Bitcoin?
There are four ways to buy Bitcoin. Each market functions differently when it comes to Bitcoins. US is one of the most advanced countries for dealing with Bitcoin as a currency. It is quite easily available in the market.
- Cryptocurrency exchanges – There are many exchanges that provide that deal in cryptocurrency like Bitcoin.
Robinhood is the most popular investment broker as it was the first to offer Bitcoin and other cryptocurrencies. Now, other big brokers like Fidelity, Sofi Wealth, Trade Station and Motif Investing also offers various plans for cryptocurrency trading.
Coinbase, Binance and Bitstamp are few of the cryptocurrency exchanges.
- Bitcoin ATMs – US has more than 3000 Bitcoin ATMs. You need to search for Coin ATM Radar if you wish to find Bitcoin ATM near you.
- Peer to peer purchase – Another way to buy bitcoins is from your peers. There are tools available to purchase bitcoins like Bisq, Bitquick and Localbitcoins.com
- Bitcoin mining – This is the fourth way to earn bitcoins. You need technical expertise to earn through this medium. Also, the cost involved is quite high, which makes this option the least popular.
Pros and Cons of Bitcoin
Like every technology, there are both pros and cons of using Bitcoins.
The Pros:
- Private transaction – Any transaction is done using bitcoin is private. No consumer information is required. Hence you can hide your identity easily. And it eliminates the risk of getting any information stolen or identity theft.
- There is no middle man in dealing with any transaction like banks or financial institutions. Nor there are any transactional charges. You can transfer directly
- You can do the transaction anytime and from anywhere you want.
- Investors see huge potential in Bitcoin as a currency.
The Cons:
- Price Volatility – There are huge fluctuations in Bitcoin pricing. Sometimes it becomes very difficult to recover your losses.
- Hacking is one of the major concerns in Bitcoin trading. Though it does have secure blockchain technology bitcoin hot wallets are always been under the radar of hackers.
- Currently, Bitcoin has limited use. Neither there are many companies trading in this currency nor the market is accepting Bitcoin payments.
- The biggest disadvantage is that insurance does not provide any cover for cryptocurrency. If it is stolen or you incurred any loss, there is no insurance company that provides any protection.
How to protect your Bitcoins?
Though Bitcoin is a safe way to make payments but is also lucrative for hackers. If you don’t take care of your Bitcoin account, someone else will.
What are the ways you should follow to protect your bitcoins?
- Always keep a backup your wallet on a regular basis.
- Put a strong password and encrypt your wallet/smartphone, to protect from thieves.
- Do not put all your Bitcoins in your active online account. Keep some Bitcoin in your offline wallet which is not connected on any of your networks. It is similar as you do not carry all the money you have in your wallet; you carry some and keep the rest in your bank account.
- Never store your Bitcoins in exchanges or third-party storage place.
- Keep your bitcoin software updated.
- Try to have multiple approval levels before you make any transactions with bitcoins.
Bitcoin Scams
Do not fall into the Bitcoin scams. There are four most common Bitcoin scams.
- Ponzi scams – These are high investment programs, wherein investors are lured with a higher rate of interest, way above than existing market rates. And also redirecting them to make payments in thief’s wallet. They also do not use common/public portals (like Bitpay or coinbase) for dealing in Bitcoin transfer.
- Bitcoin Mining Scams – In this kind of scams, the companies offers to mine a shocking number of bitcoins. The investors fall into the trap by paying huge amount of money in order to mine high bitcoin. But instead are left with neither bitcoins nor money.
- Bitcoin Exchange scams – The name itself suggest what the scam is all about. The fraud exchange centre offers a high exchange rate and features which are not provided by typical bitcoin wallets like PayPal or credit card processing
- Bitcoin wallet scams – In this type of scam the robbers will ask for your own money. And the money gets transferred in their account than yours.
You should be aware and careful with all these frauds. You need to stay vigilant trading Bitcoins.
How to make money with Bitcoin?
Bitcoin has been making a lot of headlines of late. It has become a hot discussion topic in the market. People are keen to know about Bitcoins, how it works and most importantly how one can make money using Bitcoins.
Making money with Bitcoins depends upon the many factors like:
- Your technical knowledge
- Investment experience
- Risk-taking ability
- How fast you want the rewards
Based on these factors, you can decide which method to follow.
- Bitcoin Mining – This is the most apparent way to make money, through Bitcoin mining. News coins are created after verifying the transaction information. But this requires technical knowledge and ability to solve complex mathematical problems. The miners get a huge reward if they successfully add new transactions in the blockchain.
Earlier it was easy to make good money with less expense but, now, huge investment is required in procuring specialized equipment. And if it not possible to have your setup, there are pools available to join Bitcoin mining.
- Investment in Bitcoin – You can invest in Bitcoins and have a stake in cryptocurrency just like investing in shares of any company. Making an investment in Bitcoin is a risky proposition, so you need to be careful and understand how the market works before investing.
- Trading – You can make money by Bitcoin trading. This is similar to the way you trade in shares/Mutual Funds. But trading in Bitcoin is extremely risky. You really need to have experience and good knowledge of the trading market. Dealing in Bitcoin is like an addiction if you get successful.
- Bitcoin lending – this is another way of making money in Bitcoins. You can lend Bitcoins as a loan at a certain rate of interest. If the borrower doesn’t pay you back, you will lose all your money.
- Some of the other ways to make money include:
- By doing jobs – there are some website which pays in bitcoin in return for tasks like retweeting, watching a video etc
- By running campaigns – You need to post consistently in forums to earn
Shocking Facts
| Do you know: A winner is rewarded with 12.5 bitcoins approx. every 10 minutes. No wonder people have become curious about the business of Bitcoins. |
Future of Bitcoin
Bitcoin has a long way to go. Currently, the future of Bitcoin is unknown as it is unregulated. Though countries like Japan, China, Australia are trying to regularize this currency.
The countries are working on the taxation model, security etc, but it still has a long way to go before it gets accepted by the larger audience of the society.
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FAQs
What is Cryptocurrency?
Cryptocurrency is virtual money or you can say digital money. It is considered a better and safer option than having real money.
Cryptocurrency uses cryptography to secure its transactions. In simple words, it uses complicated codes to store your data.
It can be seen as an alternate currency or subset of digital currency.
What is a Bitcoin Wallet?
A bitcoin wallet is a place where you can store your Bitcoins like a cloud.
It is like your virtual bank account from where you can send and receive bitcoins for the product and services.
There are two types of wallets where Bitcoins can be stored.
- Hot Wallets – Like a cloud, which can be excessed through computers and smartphones
- Cold Wallets – It is a portable device like a pen drive. You can download and carry your bitcoins in an encrypted portable device.
Are there any big/known companies Who accepts Bitcoins?
Some of the major companies that accept Bitcoin as Payment include:
- Wikipedia
- Microsoft
- At&T
- Burger King
- KFC
- Overstock
- Subway
- Norwegian Air
- And many more
Is Bitcoin Legal?
Bitcoin investment and trading are legal in advanced countries like the U.S, UK, Canada, Japan.
China has restricted the use of Bitcoin but is not illegal.
Similarly, in India, though it is legal to hold Bitcoins, banks are not allowed to deal in Bitcoins.
Why is bitcoin linked or popular for wrong activities?
Bitcoin is extremely popular for doing wrong activities (like drug buying or illicit activities) as the identity of buyer and seller is not known (as way as Swiss bank never reveals the identity of the person who holds the account).
Although the bitcoin transactions are recorded in the public log who holds that particular account is not unknown, as all transactions are done using wallet IDs and not names. So, it is difficult to trace any person.
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