Before 2009, it was hardly conceivable that a digital currency like bt (bitcoin) would be part of the monetary system today. As much as it may not be in vogue in all corners of the world, bitcoin has established itself as an alternative to fiat cash transactions and traditional commodities exchange. We must understand this concept.
Bitcoin (btc) is a digital currency that came into circulation in 2009. The people who created it have for some reason remained anonymous but, the name Satoshi Nakamoto has a link to this revolutionary idea that is the talk in the world financial circles.
The government does not regulate bitcoin, which is not legal tender and, all its transactions are virtual. A network of computers processes and confirms bitcoin transactions and balances. The records of its transactions are open to public access.
Since its inception, we have other virtual currencies in the world financial system – the altcom products. These currencies have become popular because they incur the less transactional cost.
Before delving into the details of how bitcoin works, it is appropriate that we get familiar with its language. Every system comes with its terminology.
Understanding the bitcoin terms
Bitcoin is a cryptocurrency. It means btc is all virtual currency that is accepted in exchange for goods and services, although many shops do not deal in it.
A key in the bitcoin context is a secret number that allows transaction. Keep a key secret, just as a password or a PIN is in other digital transactions. A key can be private or public, depending on who is using it. The key opens the wallet, an electronic interface to access bitcoins in a saver’s account.
An account must have a ledger. In the bitcoin language, a blockchain is a public ledger transaction. It forms several blocks. Each block is in link with the previous block through to the original one. A network of linked nodes run the blockchain.
A node is a computer connected to others. Nodes run according to rules in the software and will share information required to do various transactions.
Adding data to previous transactions in the public ledger is mining. A ‘mining rig’ is then a computer system carrying out this process.
Using the bitcoin network to operate a cryptographic protocol allows users to send and receive bitcoins. We call it a bitcoin ‘peer to peer’ transaction.
How bitcoin transaction works
Bitcoin works for both individuals and companies to process instant payments. What motivates processing transactions – mining – is the rewards in the form of the release of new bitcoins and the paying of transfer fees. There is no transfer authority involved, except for the use of the computer network.
Whereas the fiat currency authorities will release money concerning the supply of goods and services in the prevailing market to maintain price stability, bitcoin does so in advance, using an algorithm.
The computers answer difficult questions of the market to discover the nature of the new block that adds to the chain. The computers add to and verify transactional records across the network. The system adds blocks and rewards bitcoins to investors.
The system uses different computer hardware to add blocks – some better than others. The computer chip Application-Specific Integrated Circuits (ASIC) and Graphic Processing Units (GPUS) are two of the bitcoins mining rigs in regular use. The latter is more rewarding.
Why invest in btc?
Many people regard the bitcoin as the currency of the future. It is not far-fetched. In this world of fast technological advancement, anything goes. For instance, we already noted that since the creation of the bitcoin, other virtual currencies are here. We expect similar transactions – not just a handful – to come up.
The currencies, like the traditional ones, can buy goods and services. The bitcoin can exchange with other currencies. With faster and cheaper rates, they will continue to appeal in the financial markets. It is noteworthy that the exchange between bitcoin and the US dollar is attractive. It thus attracts potential investors, especially those interested in currency speculation.
Some taxation authorities regard bitcoin as taxable property.
In just about everything – if not all – it boils down to risks in the end. So is the case with bitcoin. Many people use them for investment rather than as a medium of exchange. In this case, there is a need to address incidences of risk. First, there is an inherent risk in the digital nature of the transactions. We also lack guarantees on the values of the transactions.
Given that the virtual currency concept is still a novelty, investors should tread carefully. We should all the time remember that virtual currency is still outside government control, although some security exchanges and security agencies issue alerts.
Some areas of concern, judging from the dealings in traditional currency, are worthy noting. Bitcoin transactions can be a fertile ground for tax evasion. The world government must be aware of this and must be watching keenly. It could also be an arena for a thriving black market.
However, of great concern is the possibility of money laundering, a crime that seems to thrive in practically every country. As in previous instances, government intervention may be virtually lacking here, and this is an instance to be exploited by criminals. One kind of criminality will lead to another. If it is not the case now – because nobody is reporting it – the reality could be different.
For a virtual service, it is necessary to address security risks. Starting with the seemingly least significant, we have the operational failures like network breakdown and the computers hanging. Worse computer crashing may occur. The outcomes here are uncomfortable delays, which also add costs.
Hackers may access accounts, and by the time of correcting the security breach, it could be time for monumental losses.
The coming of bitcoin is a technological development that has extended the scope and the depth of financial dealings. Its use is likely to reach the whole world soon.