The term ‘Bitcoin’ has been in the news since few days and it is continuing to draw people’s attention. Today, Bitcoin is not only soaring in price, it is one of the most trending topics on search engines and social media. The rising price of BTC (especially in 2017) has created more interest among people and they seem to be excited about this cryptocurrency. People are very interested to learn more about it, understand the process and invest in these cryptocurrencies to witness the benefits.
Are you wondering what’s Bitcoin? Why it has been trending these days?
We have prepared ‘A Beginner’s Guide on Bitcoin’ for your better understanding. Please check here.
Image Source: Bitcoin Wikimedia
What is Bitcoin?
Bitcoin is a cryptocurrency or a digital currency. It is commonly called as decentralised digital currency. Bitcoin (BTC) uses the rules of cryptography for generation of units of digital currency.
Image Source: Google
Well, let us understand what exactly is cryptocurrency?
As the name suggests, cryptocurrencies are currencies that are generated by computer codes and they do not have central/issuing banks like Reserve Bank of India (RBI). Moreover, cryptocurrency is generated by miners on a cryptocurrency network like Bitcoin that solves complicated mathematical problems.
In simple words, cryptocurrency (Bitcoin) is similar to the virtual cash that is stored in online wallets such as Paytm, Ola Money, and Freecharge etc. You can use this virtual money to buy products or services through the internet. Bitcoin uses decentralised technology for secure payments and storing money that does not require people’s names or banks.
Who created Bitcoin?
The Bitcoin network/currency was introduced by an unknown person named Satoshi Nakamoto in 2009. The anonymous inventor published a white paper in 2008 stating the concept of this cryptocurrency and in 2009; he released it as open-source prototype software.
It uses peer-to-peer technology (as it is a peer-to-peer version of electronic cash) to allow online payments to be sent directly to one party to another without going through a financial institution. It operates without a central authority or banking institution, managing transactions. Issuing Bitcoins (BTC) is known as mining and it is carried out collectively by the network.
Unique Characteristics of Bitcoins:
Bitcoins have unique characteristics. They are:
- Decentralized
- No Bank
- No Government
- No Capital Limit
- Account Can’t Block
- Acts as currency
- Secured transactions and storage of any kind of data are possible
- The popularity of Bitcoin is the anonymity and secrecy that it provides. The identity of parties involved in the transactions is never revealed.
- Apart from being an option for making a payment anonymously, it also attracts money launderers and tax evaders.
How does Bitcoin works?
To understand the Bitcoin or cryptocurrencies function, you need to know two keywords; Blocks and Mining.
Miners/Mining: Miners are people who secure and control the network by verifying transaction. In reward they ‘mine’ Bitcoins.
Block: A block is a bunch of transactions on the network. Every block contains a permanent and unmodifiable record of each transaction and no one can modify information about the previous block it is chained to.
So, miners work is to collect the transactions on the network and form a bundle called a block.
Let us understand the working of Bitcoin with an example:
Firstly, let’s assume two transactions (Usually, a block has thousands of transactions). Two transactions would be between A and B, C and D.
–>A pays 3 Bitcoins to B
–>C pays 5 Bitcoins to D
These two transactions form a block. (As explained, a block is a bunch of transactions).
The miners would then try to validate the transactions to validate the transactions, making sure that B and D receives Bitcoins and have enough BTC in the wallet for the transaction to go through.
To validate their transaction, miners need not enquire either of them. They can do by performing a complex mechanism which uses the power of miner’s computers. Miners use hash functions to solve blocks.
Now, let us understand the working of hash functions in Bitcoin:
In the Bitcoin protocol, hash functions are part of the block hashing algorithm that is used to write new transactions into the blockchain through the mining process.
To successfully ‘solve’ a block, miners try to combine all of the inputs with their own piece of input data in such a way that the resulting hash starts with a certain number of zeroes.
For example, they will run hash function (hash ()) program to create hash ().
After that, let us write:
hash (“Ochre Media Pvt Ltd”)
And press ENTER to see the hash digest of that string.
You will see that calling the hash function on the same string will always generate the same hash, but adding or changing one character will generate a completely different hash value:
hash (“Ochre Media Pvt”) => 7ae26e64679abd1e66cfe1e9b93a9e85
hash (“Ochre Media Pvt Ltd!”) => 6b1f6fde5ae60b2fe1bfe50677434c88
As a basic demonstration, we could try ‘mining’ with hash function by manually adding exclamation points after “Ochre Media Pvt Ltd!” until we find a hash that starts with a single zero.
>>> hash(“Ochre Media Pvt Ltd!!”)
66925f1da83c54354da73d81e013974d
>>> hash(“Ochre Media Pvt Ltd!!!”)
c8de96b4cf781a6373766c668ceac0f0
>>> hash(“Ochre Media Pvt Ltd!!!!”)
9ea367cea6a2cc4a6f5a1d9a334d0d9e
>>> hash(“Ochre Media Pvt Ltd!!!!!”)
b8d43387d98f035e2f0ac49740a5af38
>>> hash(“Ochre Media Pvt Ltd!!!!!!”)
0fe46518541f4739613b9ce29ecea6b6 => SOLVED!
Of course, solving the hash for a Bitcoin block must start with 18 zeroes (000000000000000000) that require an extremely large amount of computation.
The difficulty of the mathematical problem increases when the number of blocks in a blockchain increases. Miners keep generating hashes, a string of random numbers till someone reaches the solution.
When a solution is verified, it eventually authenticates the transactions in the block. In addition, miner who finds the solution gets a reward, akin to a commission for validating the transactions in banks. As this commission or reward is not given by the parties in the transaction, the network generates a new set of Bitcoins.
How to buy Bitcoins?
You can buy Bitcoins by signing up to a Bitcoin wallet service. You can also ‘mine’ Bitcoin using a supercomputer (an unrealistic option for most people) or set up and control your own wallet, but buying a third party service is far simpler.
You can also use Coinbase, Blockchain.info and Xapo, which you can use on both mobile and desktop. After entering your name and email address, you have to connect your bank account, debit card or credit card. Use two factor authentication to secure your account other than your phone number or SMS.
Instead, use Google Authenticator or a security key, such as the YubiKey.
YubiKey: The YubiKey is a hardware authentication device, manufactured by Yubico. It supports one-time passwords, public key encryption and authentication etc. Using YubiKey, users can securely log into their accounts by emitting one-time passwords.
Once you’ve done this, you can start investing in Bitcoin.
Remember that Bitcoin transactions are irreversible.
Resolve your doubts/questions here:
Can we convert Bitcoin into cash?
You can convert Bitcoin into cash using a Bitcoin Exchange that will allow you to sell your Bitcoin at a reasonable price, for preferred local currency (such as dollars, euros etc).
Here are the most popular Bitcoin Exchanges.
Bitfinex, Bitstamp, Coinbase, Cryptsy, BTC-e, Kraken, Bitcoin Source
Is transferring money from Bitcoin to a bank account possible?
You can exchange your Bitcoins for US dollars on these websites and have them funded to your bank account.
Coinbase – https://coinbase.com
Bitstamp – https://www.bitstamp.net
Can you sell your Bitcoins for cash?
You can sell Bitcoins for cash online. Services such as BitQuick, LocalBitcoins can help you accept cash payments for Bitcoin online.
How to Sell Bitcoins?
Selling Bitcoins is not much different from buying Bitcoins. You can find a Bitcoin exchange or trading partner that will pay you with your desired payment is the first step. From there, you can complete a trade to sell your Bitcoins.
There are three ways to get cash for Bitcoins:
- Sell Bitcoins in person for cash
- Sell Bitcoins at an ATM for cash
- Sell Bitcoins online for cash deposit
Conclusion:
Bitcoin has changed the world and it has become a part of economy now. This is what you need to know about Bitcoins and their work, trading. When you own the currency, you can decide to keep it in your digital wallet or trade it.
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