What is Bitcoin?

The creator of Bitcoin never revealed his identity and simply left his invention to the world. The origin and the motivation behind Bitcoin is still today a great source of mystery

Virtual currency Bitcoin belongs to no country and is not issued by any central bank. This currency has global circulation worth more than $1.4 billion on paper. Bitcoin has gained importance in March 2013 after a massive rise in value and the financial crisis in Cyprus. Let’s understand what Bitcoin is and how it works.

What is Bitcoin is

A kind of cyber-money, Bitcoin was initially traded among hackers and cryptologists, and increasingly traded on websites and exchanged for goods and services. BTC is the unofficial three letter code for Bitcoin. It can be used as an abbreviation, like USD for US dollar.

Bitcoin is not managed like our normal currencies. Bitcoin has no central bank or regulatory authority—which controls it.

How Bitcoin works?

Bitcoin relies on an internet-based peer-to-peer network. The money supply is automated and given to servers or “Bitcoin miners” that confirm Bitcoin transactions as they add them to a decentralised and archived transaction log approximately every 10 minutes.

The virtual currency enables direct payment over the Internet between two people. There is no middle man—such as a bank or credit card company—involved in the transaction. Bitcoin transactions—with fees that are much lower than what financial institutions charge—rely on cryptography to prevent double spending, counterfeiting or theft. 

Bitcoins can be exchanged through a computer or smartphone locally or internationally without an intermediate financial institution. 

Basics for new user

As a new user, you only need to choose a wallet that you will install on your computer or on your mobile phone. Once you have your wallet installed, it will generate your first Bitcoin address and you can create more whenever you need one. You can disclose one of your Bitcoin addresses to your friends so that they can pay you or vice versa, you can pay your friends if they give you their addresses. This is pretty similar to how email works so all that is left to do at this point is to get some bitcoins and to keep them safe. To start using Bitcoin, you are not required to understand the technical details.

To buy a Bitcoin, real money must either be deposited through an online payment company or transferred directly from a bank account into a third party website. This third party website connects Bitcoin buyers and sellers. Once the funds are available, a buyer can place an order for a Bitcoin through an exchange like Bitstamp.

Wallet or e-wallet

Your Bitcoin wallet is what allows you to transact with the world. It gives you ownership of Bitcoin addresses that you can use to receive coins from other users, and then lets you send those coins onwards. Just like email, you can receive Bitcoins when you are offline and all wallets are compatible with each other.

Each Bitcoin wallet can show you the total balance of all Bitcoin addresses it contains. Just like you can count the money in your real wallet. And in the same way, a Bitcoin wallet allows you to pay a specific amount to a specific person. This is different to credit cards where you are charged by the merchant.

Before a Bitcoin can be purchased, a user must install a virtual "wallet" or e-wallet onto a personal computer or smartphone. Using an online wallet is pretty much like using an online bank. You are trusting someone else to protect your money while you have to remember and protect your password.

The e-wallet keeps track of your Bitcoin balance and all transactions. Holders of bitcoins — which are stored using electronic “wallet” software downloaded from the Internet — are kept anonymous unless they choose to disclose their identities. 

Bitcoin can also be bought from third parties such as Bitinstant, Coinbase, etc which sends the coins directly into the e-wallet. Bitcoins are bought and traded as investments. If you receive payments with Bitcoin, many service providers allow you to convert them instantly to your local currency. Any transaction you issue with Bitcoin cannot be reversed. It can only be refunded by the person receiving the funds. 

Bitcoin exchanges 

Tokyo-based Mt.Gox K.K. hosts and operates the Bitcoin trading platform, facilitating the exchange of Bitcoins between individuals and businesses internationally. Mt.Gox offers a unique service, facilitating the exchange of Bitcoins between users globally in the currency of their choice. Mt. Gox allows users to buy, sell and trade Bitcoins on its exchange while offering support for US dollars, euros and Canadian dollars.

Multiple currency markets allow users to purchase and resell their Bitcoins in up to 16 different currencies, along with the ability to securely store Bitcoins in a virtual “vault” for safe keeping.

Members of the Mt. Gox exchange consider their Bitcoin holdings to be housed in the e-wallet, allowing for quick trading of the digital currency with other traders on the exchange. Mt. Gox charges a commission for all trades executed through the exchange.

Bitcoin: Origin & developers

In January 2009, Satoshi Nakamoto—a pseudonym for a person or group whose identity is a mystery— introduced Bitcoin. Towards the end of 2010, Satoshi left the project saying he had moved on to other things. The creator of Bitcoin never revealed his identity and simply left his invention to the world. The origin and the motivation behind Bitcoin is still today a great source of mystery.

Since 2010, the Bitcoin community has grown with many developers working on the project. During June 2011, Bitcoin suddenly gained media attention leading to a massive buy rally. The resulting bubble slowly deflated through the latter part of 2011 and the value of Bitcoin has since slowly climbed once again back to its 2011 heights.

In September 2012, the Bitcoin Foundation was created in an effort to standardise, protect, and promote Bitcoin. Today, the Bitcoin economy is developing quickly with new users joining every day. Around 11 million bitcoins are in circulation today. These numbers are expected to increase to 21 million by 2140.

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