An introduction to bitcoin

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Cryptocurrencies are created, held, traded, and used electronically. Bitcoin was the first cryptocurrency created by a software developer under the alias – Satoshi Nakamoto in 2009. Bitcoin is an electronic payment system based on mathematical proof and it functions as a peer to peer network without any intermediary.

The idea behind bitcoin is to produce a currency that is:

  1. independent of any central monetary authority
  2. transferable electronically with low transaction fees.

Transactions are recorded on a distributed ledger called the blockchain. The details of every single transaction that take place in the network can be viewed by anyone in the world, making it transparent.

Transaction fees are optional, but miners have the ability to  choose which transactions to process and tend to prioritize those transactions that pay higher fees. Fees are based on the storage size of the transaction generated, which in turn is dependent on the amount of bitcoins the sender is transmitting.

Wait, so what is mining and who is a miner?

“Mining” simply means the verification of bitcoin transactions using computational power in a distributed network. For example, Sarah buys a car from Jason using bitcoin. In order to ensure that her bitcoin is genuine and actually belongs to her, miners will begin to verify the transaction.

People who put resources into the mining process are called miners. It is the job of a miner to verify transactions that are sent by one party to another over the bitcoin network and record them into the blockchain. By doing so, miners keep the blockchain consistent, complete, and unalterable by repeatedly verifying and collecting newly broadcast transactions into a new group of transactions called a block. Each block contains a cryptographic hash of the previous block, using the SHA-256 hashing algorithm, which links it to the previous block, thus giving the blockchain its name.

Miners are compensated for the resources (primarily computational devices and electricity costs) utilised with fees, which was alluded to earlier. With the increase in the number of miners and limited supply of bitcoin, it is getting harder to mine for bitcoin computationally. At the same time, there are questions on the economics behind the mining process.

What can I do with bitcoin?

Consumers are able to use bitcoin to purchase things electronically, similar to the conventional dollar, euro or yen.

How is it different from fiat currency?

Some of the key differences of bitcoin is that it is anonymous, decentralized and the supply of bitcoin is only limited to 21 million.

None of the institutions around the globe control the bitcoin network which prevents any organisation from producing more. This is unlike what the central bank can do with the conventional dollar, thus its price is purely affected by the demand.  Despite the limited amount of supply, these coins can be divided into smaller parts and the smallest divisible amount is one hundred millionth of a bitcoin which is called a “Satoshi”. These fractions of bitcoins can be bought and sold in return for conventional dollars on several exchanges, and it can also be transmitted across the internet from one user to another.

Am I really anonymous?

Users can own multiple bitcoin addresses, also known as the digital wallet, and they are not linked to names, addresses or other personal information. This characteristic has raised concerns over criminals and terrorists activities such as money laundering, ransoms and scams. In some jurisdictions regulators are now stipulating some level of KYC.