Have you ever heard of Bitcoin? Bet, the answer is “yes”. Since its humble beginnings in 2009 when only cypherpunks and tech geeks had heard of it, Bitcoin has evolved into a mature digital currency used by millions worldwide. For the past few years Bitcoin has been dominating news headlines with the explosive growth in terms of both value and technical advances – so there’s hardly anyone who is still unaware of what Bitcoin is.
In 2017 alone, the price of Bitcoin grew 2,000%, surging from $950 to almost $20,000. These roller-coaster rides made even more investors switch to Bitcoin and bring it to the mainstream.
As popular as ever, Bitcoin still remains an obscure new concept of money for some people who are scratching their heads trying to understand it. If you are in the same boat, we are here to help you grasp the idea behind cryptocurrency and understand
the way it works.
Starting off as nothing more than a white paper which was published back in 2009 by a pseudonymous developer(s) Satoshi Nakamoto, Bitcoin has become a solution to the centralized and inflation-prone fiat currency system.
Bitcoin is a digital currency that allows its users to make online payments anonymously. Bitcoin transactions are not validated by central authorities like banks or governments; instead, they are all governed by a large network of computers. This means that Bitcoin is a decentralized form of currency with no single point of control or failure.
How Does It Work?
Bitcoin is intangible and exists only in a digital form. It circulates within a decentralized ledger called Blockchain and is technically just a line of code. Blockchain stores data about all Bitcoin transactions which have ever happened on the network. The computers on the network (nodes) track the transactions and encrypt them. The encrypted data is then accumulated and added to the blocks constituting the Bitcoin blockchain. This very process is called mining – it validates the transactions, secures the whole network, and generates new Bitcoins. Sounds complicated, doesn’t it?
To understand how blockchain works think of it as a paper based ledger, where you write down all the transactions you have made in your life. Once you have written down a transaction, it cannot be changed. Still, you can always add more transactions to the ledger to maintain the records accurately.
Blockchain is the “paper based” ledger for cryptocurrencies like Bitcoin, made up of transaction data blocks which are all added one after the other once compiled and completed.
Where Does It Exist?
There is a reason why Bitcoin is referred to as the first decentralized digital currency. When you consider the traditional banking system, you have a bank that holds the ledger and takes the responsibility for keeping the records on the ledger secure. In the case of blockchain, each and every transaction which has ever happened with Bitcoin is visible to all nodes of the network, and thus cannot be cancelled or tampered with.
If you install special software and hardware, your computer will also become a node on this network and you will also get access to the public ledger itself. The combined computational power of all the nodes is used to maintain the Bitcoin network and add more records to the blockchain.
But, with everybody having access to the ledger, one would wonder how is this secure? Well, the aspect of security on the blockchain network comes from mining. Miners are the nodes that validate Bitcoin transactions by solving complex mathematical algorithms. This is done to confirm that the transactions are accurate and can be added to the blockchain. Once a miner solves the block of transactions, it obtains a reward in Bitcoin. This reward acts as an incentive for miners to keep the blockchain secure. The more miners join the network, the more secure it is. Even if one of the nodes or multiple nodes are compromised, the consensus based process of mining enables the whole network to carry on and the compromised version of the blockchain will no longer be valid. Since there’s no centralized storage, the ledger is safe and secure.
Where Do You Get Bitcoins?
Let’s say, there is a person named Dylan who has read through this much and feels that he should get in on the game and invest in Bitcoin. He might be wondering how he will go about it. If Dylan wants to buy some Bitcoin, he will have to conduct a quick search and find an exchange which has Bitcoin on offer.
After Dylan decides on the exchange, signs up there, and goes through the whole process of verification, he will be all set for buying his first Bitcoins. Dylan will then deposit the amount in dollars which he wants to exchange for an equivalent amount in Bitcoins and just makes a purchase. Yes, it’s really that simple!
An exchange which deals with cryptocurrencies is pretty much like the exchanges for fiat currencies. You give them money in the form of a particular currency and you get it exchanged for another currency. The number of units you get depends on the current exchange rates.
There are different types of exchanges – they can be centralized or decentralized, local or global.
Centralized exchanges act as officially registered businesses that are licensed to provide money services to their customers. Decentralized exchanges work mostly as marketplaces, where individual buyers and sellers are matched with each other automatically.
When it comes to location, there are platforms that serve only the residents of one particular country (like
QuadrigaCX for Canada, or
BTCTurk for Turkey). And there are also exchanges such as CEX.IO that work globally and allow users from almost any country to trade cryptocurrency within their platform (still refer to a full review of CEX.IO for the list of countries accepted).
As of today, Bitcoin is traded at over 100 cryptocurrency exchanges. So take your time to find one that will perfectly suit your purposes.
Final Verdict – Is Bitcoin Here to Stay?
We feel that it is important for everybody to understand what Bitcoin is and how it works because Bitcoin is definitely here to stay. Bitcoin is rising in popularity and becoming more commonplace as businesses turn to it as a means of payment. It is now widely accepted by retail stores, online marketplaces, real estate agencies, casinos, and this list can go on.