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What Is Bitcoin? Let Me Explain!

In order to fully understand what bitcoin is and how it functions you must first realise that currency, the pound, the dollar, the Yen, is all imaginary. Now by this I don’t mean that the money is not tangible. Of course you can touch and feel currency, we do almost every day during our daily transactions. No it is the worth that you associate with it that is imaginary.

Take this comparison between a note and a blank piece of paper. What is really the difference? Well one is a known and recognised currency and the other isn’t. This is because everyone deems the one be a 5 pound note and has value. This is where money gets its worth from. The fact everyone believes it has value suddenly turns a piece of paper made from linen and cotton into a currency.

comparison

This is why the first decentralized digital currency Bitcoin appeals to some people because it has no ties to political system or government. This means that the currency is not vulnerable to any of their failings such as the economic crisis of 2008. All Bitcoin needs is for people to believe in it. But due to both its risks and complexity not everyone understands the concept and so Bitcoin is having a bit of crisis of its own when getting people to have faith in in it.

Basically, Bitcoin is a virtual currency in which you can use to buy and sell things online through the means of digital coins. The currency has a number of advantages, as the currency is transferred directly from user to user via the internet without going through a bank or clearing house, it means that the prices are much lower. As the currency is not tied to any country you can use them almost everywhere in the world. Also your Bitcoin cannot be frozen and there are no pre-requisites or arbitrary limits.

Bitcoin is also a crypto-currency, which means it is encrypted in a way that ensures that it cannot be copied. Every Bitcoin transaction is recorded using a block chain. It’s basically a ledger that is encoded onto the Bitcoin itself. This prevents people from spending the Bitcoin more than once since everyone on the peer to peer network knows that it just was spend. It’s essentially a number associated with an internet address stored on a phone or hard drive until it’s used again.

There are a number of ways you can acquire bitcoins. You could accept them for goods or services. You could head down to one of the numerous Bitcoin ATM and convert more traditional form of currency. Or you could mine them.

As bitcoin mimics real world resources such as gold for instance and cannot be printed, unlike more common currencies. Therefore, much like gold, Bitcoins have to be ‘mined’. Though not in the way that first comes to mind when you think of mining. No, bitcoins are mined with powerful computers and much like gold the greater the supply of miners the harder it comes to find the resource. In this case, Bitcoin.  So instead of physically heading down a shaft and mining into the rock with a pickaxe you can set up a computer to solve math problems. For example if the question is x 2y = 20 and you find the answer for x and y, you are rewarded with a bitcoin.

With little competition the problems become easy to solve, however, the greater supply of miners the harder the questions are to solve. Much, much harder. Reducing the speed at which Bitcoins enter the market.  But as the miners realise that the effort for reward is too great some miners are likely to drop out. This in turn results in easier problems, this ensures the flow of bitcoin is kept constant, their value is boosted and they remain inflation proof. Not every Bitcoin has been mined yet and it is estimated that the Bitcoin mines will not dry up until around 2140.

 

In order to fully understand what bitcoin is and how it functions you must first realise that currency, the pound, the dollar, the Yen, is all imaginary. Now by this I don’t mean that the money is not tangible. Of course you can touch and feel currency, we do almost every day during our daily transactions. No it is the worth that you associate with it that is imaginary.

Take this comparison between a note and a blank piece of paper. What is really the difference? Well one is a known and recognised currency and the other isn’t. This is because everyone deems the one be a 5 pound note and has value. This is where money gets its worth from. The fact everyone believes it has value suddenly turns a piece of paper made from linen and cotton into a currency.

comparison

This is why the first decentralized digital currency Bitcoin appeals to some people because it has no ties to political system or government. This means that the currency is not vulnerable to any of their failings such as the economic crisis of 2008. All Bitcoin needs is for people to believe in it. But due to both its risks and complexity not everyone understands the concept and so Bitcoin is having a bit of crisis of its own when getting people to have faith in in it.

Basically, Bitcoin is a virtual currency in which you can use to buy and sell things online through the means of digital coins. The currency has a number of advantages, as the currency is transferred directly from user to user via the internet without going through a bank or clearing house, it means that the prices are much lower. As the currency is not tied to any country you can use them almost everywhere in the world. Also your Bitcoin cannot be frozen and there are no pre-requisites or arbitrary limits.

Bitcoin is also a crypto-currency, which means it is encrypted in a way that ensures that it cannot be copied. Every Bitcoin transaction is recorded using a block chain. It’s basically a ledger that is encoded onto the Bitcoin itself. This prevents people from spending the Bitcoin more than once since everyone on the peer to peer network knows that it just was spend. It’s essentially a number associated with an internet address stored on a phone or hard drive until it’s used again.

There are a number of ways you can acquire bitcoins. You could accept them for goods or services. You could head down to one of the numerous Bitcoin ATM and convert more traditional form of currency. Or you could mine them.

As bitcoin mimics real world resources such as gold for instance and cannot be printed, unlike more common currencies. Therefore, much like gold, Bitcoins have to be ‘mined’. Though not in the way that first comes to mind when you think of mining. No, bitcoins are mined with powerful computers and much like gold the greater the supply of miners the harder it comes to find the resource. In this case, Bitcoin.  So instead of physically heading down a shaft and mining into the rock with a pickaxe you can set up a computer to solve math problems. For example if the question is x 2y = 20 and you find the answer for x and y, you are rewarded with a bitcoin.

With little competition the problems become easy to solve, however, the greater supply of miners the harder the questions are to solve. Much, much harder. Reducing the speed at which Bitcoins enter the market.  But as the miners realise that the effort for reward is too great some miners are likely to drop out. This in turn results in easier problems, this ensures the flow of bitcoin is kept constant, their value is boosted and they remain inflation proof. Not every Bitcoin has been mined yet and it is estimated that the Bitcoin mines will not dry up until around 2140.

 

However, before you jump to follow the trend and start trading or mining Bitcoin you must know that risks that are links with the currency. Due to the fact there is no regulatory agencies that set a Bitcoins value it tends to fluctuate wildly which is never a good sign when looking at the characteristic of a certain currency.

Another problem is security. The currency itself is fine but that doesn’t prevent hackers from targeting the banks and exchanges that deal in bitcoin. This isn’t the fault of the currency itself. For example you would not blame the pound sterling if someone had robbed a bank. But the presence of hackers and theft does in fact make the currency a less safe option.

For Bitcoin to take off and become wildly used it needs to both ensure that its volatility drops to a more steady rate. It is currently a high risk currency and so anyone who plans to work or use Bitcoin must know the risks. Also the ease in which one can convert Bitcoin into other currencies needs to improve for it to become more mainstream.

However, before you jump to follow the trend and start trading or mining Bitcoin you must know that risks that are links with the currency. Due to the fact there is no regulatory agencies that set a Bitcoins value it tends to fluctuate wildly which is never a good sign when looking at the characteristic of a certain currency.

Another problem is security. The currency itself is fine but that doesn’t prevent hackers from targeting the banks and exchanges that deal in bitcoin. This isn’t the fault of the currency itself. For example you would not blame the pound sterling if someone had robbed a bank. But the presence of hackers and theft does in fact make the currency a less safe option.

For Bit coin to take off and become wildly used it needs to both ensure that its volatility drops to a more steady rate. It is currently a high risk currency and so anyone who plans to work or use Bit coin must know the risks. Also the ease in which one can convert Bitcoin into other currencies needs to improve for it to become more mainstream.

Guest Writer: Stuart Vincent