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What is Bitcoin?

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There are a number of currencies in this world used for trading amenities. Rupee, Dollar, Pound Euro, and Yen are some of them. These are printed currencies and coins and you might be having one of these in your wallet. But bitcoin is a currency you can not touch, you can not see but you can efficiently use it to trade amenities. It is an electronically stored currency. It can be stored in your mobiles, computers, or any storage media as a virtual currency.
 
Bitcoin is an innovative digital payment system. It is an example of a cryptocurrency and the next big thing in finance. 

  • It is a virtual currency designed to act as money and outside the control of any person or group thus eliminating the need for third-party in financial transactions.
  • It is used as a reward for the miners in bitcoin mining.
  • It can be purchased on several exchanges.

There are 3 ways you can get a bitcoin in your electronic storage:

  1. Trade Money For Bitcoin: Say that the value of a bitcoin is 1 lakh rupees, so if you want a bitcoin, you can trade a bitcoin in place of 1 lakh rupees. This Bitcoin will further be stored in your electronic storage media which you can further use.
  2. Trade Goods For Bitcoin: Say that the value of a bitcoin is 1 lakh rupees and you have a commodity that has its value as 1 lakh rupees, so you can trade that commodity in place of a bitcoin, and the bitcoin will be stored in your electronic storage media.
  3. Mine Bitcoins: Other than trading, you can also mine bitcoins. Since it is a decentralized currency, there is no authority that brings bitcoins into the market. Bitcoins only come into the market by mining them.

Brief History:

“Satoshi Nakamoto” is presumed to be the pen name for the person or people who designed the original bitcoin. Bitcoin was first introduced in the year 2009 as a medium of exchange. Bitcoin then started as a peer-to-peer network to generate a system for electronic transactions. Since then, there has been a rapid growth in the usage as well as the value of bitcoin which is a popular system of digital currency.

Features:

  • Distributed: All bitcoin transactions are recorded in a public ledger known as the blockchain. There are nodes in the network that maintain copies of the ledger and contribute to the correct propagation of the transactions following the rules of the protocols making it impossible for the network to suffer downtime.
  • Decentralized: There is no third party or no CEO who controls the bitcoin network. The network consists of willing participants who agree to the rules of a protocol and changes to the protocol are done by the consensus of its users. This makes bitcoin a quasi-political system.
  • Transparent: The addition of new transactions to the blockchain ledger and the state of the bitcoin network is arrived upon by consensus in a transparent manner according to the rules of the protocol.
  • Peer-to-peer: In Bitcoin transactions, the payments go straight from one party to another party so there is no need for any third party to act as an intermediary.
  • Censorship resistant: As bitcoin transactions are pseudo-anonymous and users possess the keys to their bitcoin holdings, so it is difficult for the authorities to ban users from using their assets. This provides economic freedom to the users.
  • Public: All bitcoin transactions are available publicly for everyone to see. All the transactions are recorded, which eliminates the possibility of fraudulent transactions.
  • Permissionless: Bitcoin is completely open access and ready to use for everyone, there are no complicated rules of entry. Any transaction that follows the set algorithm will be processed with certainty.
  • Pseudo-anonymous: Bitcoin transactions are tied to addresses that take the form of randomly generated alphanumeric strings.

Value of Bitcoin

A normal piece of paper and a currency note is physically the same but the value of the note is decided by an authority or a centralized government. But Bitcoin is a currency that does not have any centralized government or authority to control and decide its value. It is a decentralized digital currency. 

  • As of now, the value of 1 bitcoin is 23,54,953.68 Indian Rupees but this value fluctuates as there is no centralized authority to control it. 
  • In December 2011, the value of a Bitcoin was estimated to be 2 US dollars, in December 2013, it went up to about 1000 US dollars.

How Do Bitcoin Transactions Work?

Bitcoin transactions are digitally signed for security. Everyone on the network gets to know about a transaction. Anyone can create a bitcoin wallet by downloading the bitcoin program. Each bitcoin wallet has two things:

  • Public key: It is like an address or an account number via which any user or account can receive bitcoins.
  • Private key: It is like a digital signature via which anyone can send bitcoins.

The public key can be shared with anyone but the private key must be held by the owner. If the private key gets hacked or stolen then bitcoin gets lost.

A bitcoin transaction contains three pieces of information:

  • Private key: The first part contains the bitcoin wallet address of the sender i.e. the private key.
  • Amount of bitcoin to be transferred: The second part contains the amount that has been sent.
  • Public key: The third part contains the bitcoin wallet address of the recipient i.e. the public key. 

Bitcoin transactions are verified by the nodes on the network. Once the transaction is verified and executed successfully, the transaction is recorded in a distributed public ledger called a blockchain. A bitcoin can also be considered as an invisible currency with only the transaction records between different addresses. 

How Do Bitcoins Come Into Market?

Bitcoins are a decentralized currency, they aren’t printed, like rupees, they’re produced by people, and big companies, running computers all around the world, using software that solves mathematical problems. 

  • Bitcoins are mined using the computing power of the distributed network. This network also processes transactions made using Bitcoin. 
  • Bitcoins are mined on the basis of computing power, so they take time to be generated. 
  • To keep it valuable, it has been stated that only 21 million bitcoins can be created by miners. By the year 2140, all the bitcoins will be created. 
  • Around the world, thousands of computers with very high computing power are processing transactions and securing the network by solving complex mathematical calculations and collecting new bitcoins in exchange. 

How Does Bitcoin Mining Work?

In the Bitcoin network, there are nodes that use the computing power of their CPU to process the transactions. The following are the steps followed while mining a bitcoin:

  • The user initiates the bitcoin transaction by listing the details like the number of bitcoins to be sent, and the public address, and affixing the private key to generate a digital signature. The encrypted information to the miners present on the network.
  • The miners will verify the transaction to check whether there is sufficient balance to carry out the transaction.
  • The faster the CPU of a miner, the greater the chances for the miner to get rewarded for verifying the transaction. The miner’s job is only to provide the CPU, there is no manual intervention from the miner. The bitcoin program will run automatically on the system.
  • Once the transaction is verified, the number of transactions is broadcasted to the network of miners who can copy or download the block.
  • These blocks through timestamps are stored in sequential order to form a blockchain. 
  • Each miner in the network must have an updated copy of the blockchain ledger in order to earn bitcoins.

How Do You Buy Bitcoin?

There are three ways to get a bitcoin:

1. Buying: Many marketplaces like Bitcoin exchanges allow users to buy or sell bitcoins using different currencies. If one does not want to mine a bitcoin, it can be bought using a cryptocurrency exchange. Most people will not be able to purchase the entire BTC due to its price, so it is possible to buy portions of BTC on these exchanges in fiat currency like U.S. Dollars. The following steps can be followed to buy bitcoin outside the online exchanges:

  • Each person who joins the bitcoin network is issued a public key and a private key.
  • When a person buys a bitcoin or sends/receives it, the person will receive a public key.
  • The person can only access the bitcoin using the private key (it has) with the public key (it received).

2. Mining: People on the bitcoin network compete among themselves to mine bitcoins using computers to solve complex maths puzzles. This is how bitcoins are created.

3. Transfer: Bitcoin can be transferred from one account to another just like digital cash using mobile applications or computers.

How is Bitcoin Used?

Below are some of the ways of using bitcoin:

  • Payment: Bitcoin is accepted as a mode of payment for goods and services at many merchants, and retailers. To use bitcoin, wallets are required. cryptocurrency wallets contain private keys to the bitcoin, which need to be entered while conducting a transaction. 
  • Investing: portfolio: Bitcoin grew in popularity which made Investors and Individuals interested in investing in the cryptocurrency Bitcoin. Individuals can invest in Bitcoin to help diversify their portfolio of stocks and bonds.  

Benefits of Bitcoin

The following are some of the advantages of using bitcoins:

  • User anonymity: Bitcoin users can have multiple public keys and are identified by numerical codes. This ensures that the transactions cannot be traced back to the user. Even if the wallet address becomes public, the user can generate a new wallet address to keep information safe.
  • Transparency: Bitcoin transactions are recorded on the public ledger blockchain. The transactions are permanently viewable, which gives transparency to the system but they are secure and fraud-resistant at the same time due to blockchain technology.
  • Accessibility: Bitcoin is a very versatile and accessible currency. It takes a few minutes to transfer bitcoins to another user, so it can be used to buy goods and services from a variety of places accepting bitcoins. This makes spending bitcoin easy in another country with little or no fees applied.
  • Independence from central authority: Bitcoin is a decentralized currency, which means there is no dependence on any single governing authority for verifying transactions. This means that the authorities are not likely to freeze or demand back the bitcoins.
  • Low transaction fees: Standard wire transfers involve transaction fees and exchange costs. Since bitcoin transactions do not involve any government authority so the transaction fees are very low compared to bank transfers.

Drawbacks of Bitcoin

The following are some of the cons of using bitcoin:

  • Volatility: There are various factors that contribute to the bitcoin’s volatility like uncertainty about its future value, security breaches, headline-making news, and one of the most important reasons is the scarcity of bitcoins. It is known that there is a limit of 21 million bitcoins that could ever exist which is why some regard bitcoin as a scarce resource. This scarcity makes bitcoin’s price variable.
  • No government regulations: Unlike the investments that are done through central banks, bitcoins transactions are not regulated by any central authority due to a decentralized framework. This means that bitcoin’s transactions don’t come with legal protection and are irreversible which makes them susceptible to crimes.
  • No buyer protection: If the goods are bought using bitcoins and the seller does not send the promised goods then nothing can be done to reverse the transactions and since there is no central authority so no legal protection can be provided in this case. 
  • Not widely accepted: Bitcoins are still only accepted by a small group of online merchants. This makes it unfeasible to rely completely on bitcoin as a currency and replace it with traditional bank transactions.
  • Irreversible: There is a lack of security in bitcoin transactions due to the anonymous and non-regulated nature of the bitcoin transactions. If the wrong amount is sent or the amount is sent to the wrong recipient then nothing can be done to reverse the transactions.


Last Updated : 02 Feb, 2023
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