WHAT IS BITCOIN
WHAT IS BITCOIN?
Every country has its own currency.
Estonia and the Eurozone have the Euro, Russia has the Rouble and the USA have
US Dollars. We exchange money in banks or specialized foreign exchanges,
transfer it worldwide and invest it. In our times of technological innovation
it is safe to say that most, if not all money transfers are conducted through
the Internet.
Is it then such a great surprise
that an online currency such as Bitcoin has emerged? Interest in the currency
has grown towards the end of 2013 due to significant spikes in the currency’s
value, but let’s start from the beginning. In 2009, an unknown programmer by
the name of Satoshi Nakamoto put forward a whitepaper that proposed a creation
of new form of digital currency – cryptocurrency. Cryptocurrency functions the
same way as regular currencies do in that its used as a means of exchange, unit
of account and a store of value. Cryptocurrency, just like other resources, has
some demand for it, and subsequently a market price. The significant difference
is Bitcoin’s intangibility – there is no bank-issued notes or papers – meaning
that rather being used in hand-to-hand transactions, Bitcoins are stored and
exchanged digitally within a decentralized, peer-to-peer network.
HOW DOES BITCOIN WORK?
With traditional money, transferring
funds from one account to another requires some intermediary authority or
middleman. Even with hand-to-hand cash transactions, the issue, value and
fiscal policy of money is controlled by a trusted centralized authority (such
as a bank, agency or government). Bitcoin operates differently in that no
middleman is required in transactions as the trust between actors is derived
from computer science and cryptology, rather than trust in a central
establishment. It also means that Bitcoin is transferred directly from the
sender to the receiver, with absolutely no intermediaries.
A key point to note is that because
of this lack of central issuing body, cryptocurrency is created and transferred
with the help of a process called “mining”. This process requires an extremely
powerful computer to crunch down the billions of calculations required to solve
cryptological functions.
In reality, the mining process is
extremely complex and technical. Despite its complexity, the process is transparent
and open for review due to the open-source nature of Bitcoin.
WHAT ARE THE STRENGTHS AND WEAKNESSES OF BITCOIN?
Bitcoin is the first decentralized
and uncontrolled currency. Since no central body owns the process for issuing
new units, new coins are created at a fixed, predetermined rate. Unlike many
government-issued currencies, this means that Bitcoin is immune from inflation,
and is in fact a deflationary currency. Bitcoin also has the un unique property
of “transparent anonymity”- meaning that despite all transactions and wallets
being public through the Blockchain, all actors in a transaction are only
identified by their bitcoin wallet address. Thousands of addresses are
generated daily – this means that the user stays anonymous until they register
both their personal details and their bitcoin wallet address somewhere (for
example on a Bitcoin exchange). Bitcoin’s unique makeup also creates other
strengths from the users perspective- the digital nature of Bitcoin makes it
highly divisible and the lack of a central authority ensures that transaction
fees are near-zero.
Bitcoin’s digital nature and lack of
central body also shape Bitcoin’s weaknesses - lost Bitcoins are
non-recoverable (meaning that if you lose your private key or the hard drive with
your wallet gets corrupted or if you lose your bitcoin wallet seed, those
Bitcoins are lost forever!). Take the case of a British man, who in 2009, threw
away the hard drive that contained his 7500 Bitcoins. At the end of 2013, the
value of Bitcoin was nearing $1200, meaning there was a hard drive at a dump
with over 8.25 million USD stored on it! Stories like this are not uncommon as
early miners have been known to mine thousands of new coins, which would have
made for a small fortune even with todays weak Bitcoin exchange rate.
SO THEN, WHAT IS BITCOIN?
Bitcoin is a peer-to-peer payment
system. Its unique properties attract many followers and opponents.
It’s impossible to tell whether
Bitcoin will establish itself as the sole payment system for the internet, but
for right now – there is significant interest and demand for it. The Bitcoin
economy is still in its infancy and there are already many investors and people
who are attracted by the prospects this new disrupting technology may bring.
The future of Bitcoin is unclear at
the moment due to legal uncertainty (governments cannot issue it, but they can
prohibit use), unstable exchange rates and subsequent lack of widespread
(albeit rapidly growing) adoption. However, people familiar with Bitcoin and technology
often note the similarities between Bitcoin’s ascendance and the rise of
Internet in the 1990-2000s. When the Internet first emerged in the early 90s
many experts underestimated the impact it would have on the world. It is often
predicted Bitcoin will follow the same pattern. Until then, current users are
embracing this truly innovative idea and are contributing to establishing a
global bitcoin economy.
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