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The A to Z Of Bitcoins

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All of you following Trak.in would have surely come across the news that Bitcoin has hit $1,000 for the first time. From $1 in November 2012 to more than $1000 in November 2013, so surely it has some curiosity quotient.

So wondering what a Bitcoin is and whether there are more virtual currencies like these? Let’s get enlightened on this subject. Read on…

What is a Bitcoin?

It is an experimental payment network and a digital currency (not like your debit/credit card) that is created and exchanged independently of any government or bank (means free from financial crisis, depressions and slowdowns). It is a peer-to-peer currency that enables instant payments to anyone, anywhere in the world. Peer-to-peer means that no central authority issues new money or tracks transactions. These tasks are managed collectively by the network.

The currency is generated through a computer program and can be converted into cash after being deposited into virtual wallets. A cryptocurrency to be precise. In some ways, it seeks to replace both federal currencies and a world of payment systems, but it must also play nicely with existing financial systems.

So, if hard currency is like a physical record, then Bitcoin is like an MP3.

Origin: Bitcoin began in 2008, at the height of the financial crisis, with a paper published under the pseudonym Satoshi Nakamoto by a mysterious programmer (or programmers) under the MIT license.

Units: The smallest unit of the Bitcoin currency (1/100,000,000) has been named “satoshi” in collective homage to his founding of Bitcoin. As of March 2013, more than 10.5 million of the total 21 million BTC had been created. To ensure granularity of the money supply, each BTC unit can be divided down to eight decimal places (a total of 2.1 × 1015 or 2.1 quadrillion units).

Theoretically all Bitcoins will be generated by 2140, with the last one consisting of fractional parts. Bitcoin’s mathematically elegant design ensures that the money supply can increase only at a fixed rate that slows over time and then stops altogether.

How do they look like: They are virtual currencies, so look something like this.

BitCoin Image

[Source]

Does Bitcoin Have ATMs?

The world’s first Bitcoin ATM opened in Vancouver on 1 November. The machine allows “users to exchange their credits of the digital currency for cash and vice-versa.”

Its Working

It exists through an open-source software program and its supply is controlled by a computer algorithm. Once you download and run the Bitcoin client software, it connects over the Internet to the decentralized network of all Bitcoin users and also generates a pair of unique, mathematically linked keys, which you’ll need to exchange Bitcoins with any other client. One key is private and kept hidden on your computer. The other is public and a version of it dubbed a Bitcoin address is given to other people so they can send you Bitcoins.

Benefits

Bitcoin transactions can be anonymous, irreversible by design, fast and funds received are available for spending within minutes. The transactions cost very little, especially compared to other payment networks.

How are Bitcoins generated:

The process of generating Bitcoins is quite complicated and involves solving complex algorithms and sharing the solution with the entire network. The “mining” is very computationally intensive and requires powerful computers. Currently only 25 bitcoins are generated roughly every 10 minutes. So people like you and me should forget trying to generate!

Transfer of Bitcoins

The quickest, easiest and safest way to buy Bitcoins is from other users. When you perform a transaction, your Bitcoin software performs a mathematical operation to combine the other party’s public key and your own private key with the amount of Bitcoins that you want to transfer. The result of that operation is then sent out across the distributed Bitcoin network so the transaction can be verified by Bitcoin software clients not involved in the transfer.

Bitcoins Trading

Exchanges like Mt. Gox provide a place for people to trade Bitcoins for other types of currency.

Volatility

The price of a Bitcoin can unpredictably increase or decrease over a short period of time due to its young economy, novel nature, and sometimes illiquid markets. Consequently, keeping your savings with Bitcoin is not recommended at this point.

Bitcoin should be seen like a high risk asset, and you should never store money that you cannot afford to lose with Bitcoin. It can be compared to an ultra-high risk trading scrip. Investors say bitcoin is highly speculative, and should not exceed 1% of a portfolio.

Who Controls it?

It is controlled by all Bitcoin users around the world. While developers improve the software, they can’t force a change in the Bitcoin protocol because the virtual currency can only work correctly only if there is a consensus among all users!

Legal or Illegal

U.S. Federal Reserve Chairman Ben Bernanke has said that the Fed doesn’t have the authority to supervise virtual currencies, but that they “may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system”, thus giving a boost to its patrons.

Mainstream or isolated

Efforts like this Black Friday sale are underway so that merchants accept Bitcoins. Demand for Bitcoin has been particularly strong in China, where the leading search engine, Baidu now accepts the currency for certain services.

Bitcoin Transactions

At the end of August 2013, the value of all Bitcoins in circulation exceeded $1.5 billion with millions of dollars worth of Bitcoins exchanged daily.

Secure transactions or not

A Bitcoin transaction is usually deployed within a few seconds and begins to be confirmed in the following 10 minutes. During that time, a transaction can be considered authentic but still reversible. Dishonest users could try to cheat. If you can’t wait for a confirmation, asking for a small transaction fee or using a detection system for unsafe transactions can increase security. For larger amounts like 1000 USD, it makes sense to wait for 6 confirmations or more. Each confirmation exponentially decreases the risk of a reversed transaction.

Catching up in India or not:

When I tried buying Bitcoins worth 1000 INR through localbitcoins.com, I got just one seller in Mumbai and that too, unverified. So, as far as India goes, not much is happening on Bitcoin front as of now.

Finally, how do you buy Bitcoins

I believe by far the best way to get Bitcoins is to provide goods and services for Bitcoin. This stimulates the Bitcoin economy and makes the Bitcoins you receive more valuable. However, you can still see a list here.

Micro-minnow, Fad or here to stay

Some of us will recall great historical bubbles like Tulipmania, where Holland became obsessed with flower bulbs imported from Turkey. Vast inflation in blooms sadly led to bust. A Bitcoin “backlash” is likely as governments and established financial institutions fight to retain their supremacy. Bitcoin will face political pressure and aggressive lobbying from big banks because of its disruptive nature.

Alternatives: In the alternative galaxy of virtual currencies, newly created money can become worth millions of real dollars in a few months. There are dozens of digital alternatives, like PeerCoin, Litecoin and anoncoin, whose backers point to advantages they say their currency has over Bitcoin.

In a world where governments cannot be trusted to look after our money, Bitcoin, bubbles or not, is doing us all a favor, charting the brave new world of money. The challenge is to make it useable in our day-to-day transactions.

So, anyone out there who owns any Bitcoins?

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  1. […] computers and algorithms time-stamp each transaction using a proof-of-work system. This complete A-Z of Bitcoin post will help you understand more about the technical aspects of […]

  2. Shankar says

    Hi Arun,
    I bought few bitcoins few months before for around £86 now its worth nearly £700.
    Some say, one might even cost upto 1 million in 10 years time, so its better to buy now than to regret later. the maximum you could lose now is trivial compared to what you can gain.
    By the way, if you know some place where I can buy bitcoin using INR, please let me know.

  3. Allshare.in says

    Not very comprehensive article but covers whatever needs to be known,

  4. Chitraparna says

    Interesting resource Amit. I couldn’t find complete information on Bitcoin anywhere else.

    Do you think Bitcoin will catch-up in India?

    1. Arun Prabhudesai says

      @chitra In my view, it is an extremely volatile and risky bet as of now. Only a very small group has bitcoins as of now, and someone will come up with a way to hack them sooner rather than later (thats what I think)..
      I am keeping away from it, till the time it really goes mainstream…

  5. Nishant Srivastava says

    Future of the Internet, but still very risky if its value is that much, because it can easily theft or hack by some bad people, like other internet crimes..

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