Bitcoin is a payment system, which operates in the virtual space between peers without any bank or authority managing transactions. Bitcoin transactions are verified by network nodes and recorded in Blockchain, a public distributed ledger. Blockchain consists of blocks that contain time-stamped batches of bitcoin transactions. Each block includes hash of the prior block, thus linking the blocks together.
Bitcoins are issued collectively by the network through a competitive and decentralised process called mining. As per Bitcoin.org, “Bitcoin is open source: its design is public, nobody owns or controls Bitcoins and everyone can take part.”
Bitcoin was invented by Satoshi Nakamoto in 2008 and released as open source software in 2009. Bitcoin is the first decentralised digital currency, also known as virtual currency and cryptocurrency. The smallest unit of bitcoin currency is satoshi . One satoshi is one hundred millionth of a single bitcoin.
1 Bitcoin = 100,000,000 Satoshi
How does Bitcoin work?:
Get a bitcoin wallet that you can use to send and receive bitcoins. There are many wallet apps available in the market both for mobile handsets and desktop computers. You can choose one to operate in the bitcoin world.
You can sell your services, products to acquire Bitcoins or you can buy bitcoins from other people through a Bitcoin exchange. You can also earn bitcoins by the process of mining. Slowly, bitcoins are gaining tractions. Merchants have incentives to accept payments in bitcoins. There is no fee on receiving bitcoins, whereas merchants end up paying 2-3 percent in transaction fee when they receive payments through credit or debit cards.
Some large companies have started accepting bitcoin payments. Recently Dell announced to accept bitcoins for purchase of its products. People can also buy games and apps from Microsoft using bitcoins.
Why Bitcoins are becoming popular?:
Bitcoins provide complete payment freedom. Though some countries have banned bitcoins, you can make bitcoin payment anytime, anywhere in the world.
Choose your own fees: Unlike credit cards, there is no fee on receiving bitcoins. You decide how much fee you pay while making transactions. Higher fees can help in faster confirmation of your transactions. Also fees are not based on the amount of transaction; it is possible to transfer thousands of bitcoins for the same fee as for transferring one bitcoin. Banks may charge a high fee for international money transfer, whereas with bitcoins it is very small or zero.
Low risks: Bitcoin transactions do not contain customer’s personal information and are irreversible. Since these transactions are irreversible, merchants are saved from losses arising out of fraudulent transactions.
Higher control: With bitcoin, merchants cannot force unwanted or un-notified charges as can happen with other methods of payments. Bitcoin users can also use encryption and backups to protect their money.
Complete transparency: Information on bitcoin money supply is easily available on blockchain for anybody to verify it. No one can modify blockchains as it is cryptographically secure.
Low acceptance: Most people are still not aware of bitcoin at large and list of businesses accepting bitcoins are also very small.
Highly volatile: Since the total value of bitcoins and number of businesses happening with are still small, any event or trade activity can alter the price of bitcoin significantly. Today bitcoin and other digital currencies are quite far from state of a matured currency, but is expected to gain larger acceptance among people and states in the time to come.
We will learn more about Bitcoins in next posts.