Bitcoin is a form of payment that exists only in the digital world. It was first introduced in 2009 and has been one of the biggest game changers in the online financial market. Bitcoin was designed for the digital era and the era of information. Bitcoins fulfills all the traditional definition of money, where it has value, it is a medium of exchange and it has a unit of account.
Many believe that Bitcoins will have the same effect on global finance as the internet has had on media and information.
Perhaps the most asked question regarding Bitcoins is “Where do Bitcoins come from?”
Bitcoin is created by a powerful software called Block Chain. Similar to mining gold, Bitcoin is mined on a computer. There is a finite number of bitcoins and anyone with a shrewd mathematical mind is able to obtain it.
Block Chain is the operating system or distribution network that allows Bitcoin to run. The term Block Chain was used because every transaction on Bitcoin that happens anywhere creates a block and linked all over, and everyone can see the block, therefore it is transparent. Block Chain is an open source software and anyone can review the transactions.
With bitcoins, “miners” solve bitcoin algorithm to obtain a set number of bitcoins. This is done with a Bitcoin hardware which is similar to a computer. Once you purchase the hardware, you then input a mining software into the hardware. Then you join what they call the “mining pool”. This is the term used for the community of bitcoin miners to solve the mathematical algorithm in order to mine bitcoins. Once a bitcoin is mined, then you can store it in your bitcoin wallet. As the frequency of mining gradually increases, the algorithm gets more difficult
By design, there will only be 21 million bitcoins available, therefore like any resource, it is scarce.
The text book advantage of Bitcoin would be that money is transferred from person to person, without any intermediaries in the middle, such as banks or clearing houses. This significantly reduces any fees, and transactions are immediate. Since there are no banking regulations involved, accounts cannot be frozen and there are no prerequisites or limitations.
Furthermore, the Bitcoin network is free and nobody really owns it. It is offered in an open-sourced software where anyone who mines, trades, buys or sells bitcoin is part of the community. Like the internet, Bitcoins are global and no one person or country owns it.
While for most people, Bitcoin might not be deemed as safe, it is quite the opposite. Bitcoin is a cryptocurrency, meaning all transactions are encrypted, while all transactions can be seen and needs to be approved by anyone dealing with bitcoins, especially the miners. Each bitcoin transaction has to be verified by miners, therefore more miners means more secure transactions.
In terms of security in transactions, similarly to a cheque, Bitcoin requires a signature to prove that a person is the owner of the account, but rather than signature, it is based on a code. When a new account is create in a bitcoin wallet, a mathematical number is generated, which is linked to that account number. Every time a transaction is made, a “signature” is generated, which only applies to that specific transaction. This code cannot be copied or be reused as they are unique to each transaction.
The increase of acceptable of Bitcoin as an acceptable payment method has resulted in a cheaper, quicker and more accessible form of online monetary transactions.
Bitcoin is seen as a contemporary form of online payment method, mostly credited to its reduced fees and swiftness. With a simple click of a button and an encrypted address, you can send or request bitcoin or buy and sell bitcoins.
Some of the popular bitcoin wallets include:
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