You may have heard of Bitcoin and not understood what it is or what it does. The only thing you may know about it is that it is immensely valuable these days. It was invented by an entity (not clear who it was or even whether it was an individual) known as Satoshi Nakamoto. It is the first of its kind, but there are now other forms of cryptocurrency. Before you get to understand how it works, you should know that Bitcoin is a form of decentralized currency – it is not regulated by any institution eg. A Central Bank. It runs on a platform known as a blockchain.
What is Blockchain technology?
Blockchain is an open-source platform that was originally designed to handle (and it still does) Bitcoin transactions. A transaction is called a block and the publicly accessed ledger containing the transactions is called a blockchain. For a rudimentary understanding of blockchain, think of a network of computers. There is no hierarchy of this network; which means there is no server or client. The purpose of this network is to allow the recording of transactions. The recording is done synchronously throughout the network so that when one transaction happens, every computer can see the transaction and they are all on the same page.
Therefore, the system is virtually incorruptible because it is very difficult to alter a record illegally as you would have to hack thousands of computers. Everything is a matter of public record and the database is stored on each computer on the network.
It is these desirable features that have enabled blockchain technology to evolve and become useful to other industries. It has become particularly convenient where tracing transactions are vital for integrity and ethical practice.
How Bitcoin Works
Bitcoins are created by mining them. Mining bitcoins mean adding blocks (single transactions) to the public ledger. The number of bitcoins that can be mined is finite and will one day level off at 21 million Bitcoins. To be involved with the sale or purchase of Bitcoins, you need a digital wallet. A bitcoin wallet is the software you use to communicate with the Bitcoin network to tell it when you want to send or receive transactions. It works like an email address whereby the emails are the transactions and the address is the wallet.
You can exchange Bitcoins for normal currency because there is an exchange rate. The exchange rate is dictated by demand which is very unpredictable.
Advantages of Bitcoin
Bitcoin and other cryptocurrencies have some advantages over conventional currency: • Transaction fees are minimal: There are no regulatory authorities and middlemen to drive up the fees. You only pay for the platform.
- They are universal: You can use them anywhere in the world, unlike the normal currency that differs from country to country.
- Your Wallet cannot be frozen: Governments cannot freeze it and prevent you from using it.
- Fewer restrictions: There are no prerequisites and arbitrary limits and any other restrictions usually imposed on normal currency.
- The value relative to normal currency is very unpredictable. It has fluctuated wildly over the past two to three years alone.
- Governments are skeptical about it and that makes investors apprehensive about it. It is one of the reasons why the value has gone down.
People are split about the future of Bitcoin and other cryptocurrencies. However, blockchain has been well received and may play a bigger role in how we conduct business in the future.