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What ‘Is & How’ does Bitcoin Work?

Unless you are one of those types that go through your wallet/purse for a checkbook in the grocery lineup, you have probably gotten used to the idea of a paperless, post-cash economy.

Who wants to carry around a bunch of bills and coins when you can just tap your card and get the same ‘adrenaline rush’ followed by the same ‘instant regret’.

So maybe it isn’t surprising then, that completely digitize forms of currency, namely ‘Crypto-Currency’ are becoming more popular.

In this article, I will be discussing Bitcoin in detail, because it is the most recognized cryptocurrency at the moment.

So,

 

What is it that makes Bitcoin transactions different from shopping on Amazon with a credit card digitally?

You may already know, that while normal electronic transactions still involve conventional money, Bitcoin is decentralized, meaning that its distribution and exchange are not controlled or regulated by a government or other authority.

And the technical side of things is also very different.

The Technical Side

Traditional currency goes through a ‘Central Payment Processor’ like your credit card company

But all Bitcoin transactions, whether you are purchasing goods, or just sending Bitcoins to a friend because you are a nice guy! are processed by a large distributed network of computers running special software.

So, whenever a transaction occurs, the network records the senders and receivers Bitcoin addresses. And the amount transferred, and enters this information on to the end a Ledger or Record called a ‘Blockchain’.

The Blockchain is updated over a hundred times per day and is sent to every computer that processes Bitcoin.

Because each transaction is encrypted with public e-cryptography, and verified by multiple points in the network to ensure that every computer that processes Bitcoin is using identical, correct copies of the Blockchain, it is virtually impossible to counterfeit.

This verification process is performed by what are called ‘Bitcoin Miners’; computers or other processing devices that individuals like you and me connect, to this large processing network.

The mining software that runs, works by grouping recent transactions into blocks which are only accepted by the rest of the network if the block is ‘Hashed’ correctly.

Which requires the computer to find correct numerical values; A time-consuming computer intensive process.

 

What’s in it for the members of the Processing Network?

Once a computer does successfully process a block, it is added to the Blockchain and the system generates a new Bitcoin that goes into the miner’s digital wallet as a reward.

So, your computer ends up literally creating money for you, out of nothing.

Can you just mine Bitcoin and never work again? Well, it is a bit more complicated than that.

It takes a lot of processing power to generate an appreciable amount of Bitcoin. And since the system is designed for it to take about 10 minutes to successfully process a block, the difficulty of mining generally increases as more nodes join in the network.

Not to mention the cost of entry is fairly high.

In the early days, you could mine on your spare laptop. Then for a while, high-end popular graphics cards were a popular choices, thanks to their highly parallelized number-crunching optimized architecture.

But these days, though it should be noted that this doesn’t necessarily apply to other Crypto Currencies, Bitcoin can only be profitably mined using specialized mining appliances called ASIC miners.

Unlike graphics cards, these can only be used for Bitcoin mining in most cases and they can cost 1000’s of dollars each.

They also use up a TON of power, which due to high electricity rates in many parts of the world, can kill any chance of profitability for the average person.

 

So it is obvious why people are mining Bitcoin because there is profit to be made, but why do other people want it?

Well, some people are mistrustful of banks and governments to keep their money secure and have a lot more faith in Bitcoin’s redundant Blockchain system.

Especially as more and more retailers begin to expect CryptoCurrency.

Others like the partial anonymity that Bitcoin offers.

The only thing that ties you to a particular Bitcoin address is an encryption key. Plus, you could grab a new address for every transaction you make.

In fact, many paid VPN services except Bitcoin payment for people who are concerned about staying incognito online.

Still, others look at Bitcoin as an investment. Though you should tread carefully here.

 

Because Bitcoin is completely unregulated, there is no guarantee of its value. Not even a flimsy one. So, investing lots of money in Bitcoin, at least for now is considered ‘speculative level risk’.

However, the system is designed so that by the year 2140 no new Bitcoin will be produced. Leaving some to believe that down the line it will be a more secure virtual commodity of sorts that will provide a hedge against inflation of traditional currencies.

Kind of how like some people invest in Gold bars for the same reason.

 

Which sounds cool in theory, but right now Bitcoin is bit of a roller coaster ride

 

The value of one Bitcoin recently jumped from a few hundred dollars in 2016 to nearly 20,000 around the edge of 2017.

And while watching the value of Bitcoin spike suddenly can be thrilling if you got some in your digital wallet, I would advise that you don’t take out a second mortgage on your home just to get in on the latest craze.