Friday, December 8, 2017

What is a Bitcoin?

There are two keywords to understand Bitcoin: digital and currency. Understanding each of those financial terminologies should help even the most ignorant person to understand what it is all about. Bitcoin is real money just like the pennies in your pocket and the dollars in your wallet, assuming you haven’t spent them on a VPN account because you don’t want your employer to know what videos you watch online. On the other hand, Bitcoins do not have any physical form. It is often referred to as cryptocurrency or digital asset secured by cryptography system.


Bitcoin has no central banking system. In the U.S. and probably all other countries, one of the main requirements to be eligible for financial services is that you need to register with a bank and comply with plenty of complex rules on how you use your own money. A central bank (government-sponsored) has the power to create, distribute, and remove money from circulation. It does not mean that the central bank can choose which people deserve to be rich and which don’t, but it has the authority to regulate how money should be used. Of course you don’t have to ask permission anytime you need to buy a wig or new set of dentures, but there are many other models of transactions where you must comply with the bank’s rules for examples banking hours and international money transfer.

Bitcoin is classified as Decentralized Currency NOT because it has no rules but for the reason that the government or central bank does not have the authority over it. Bitcoin is independently controlled by a network of users that oversees and verifies the currency’s transactions and creations.

Here is an example:

Let us just say you are fortunate enough to purchase a brand new life-sized Lamborghini toy from Italy. For some misunderstood reasons including the fact that the two of you have never heard of PayPal, the seller does not want to sell it in dollars because in Italy the person uses Euro. Thankfully Bitcoin is worldwide currency, so there isn’t any legal consequence for using the currency to complete the transaction. There is no conversion rate, bank fee, and bank delay involved. Banking hours are irrelevant too because you don’t need any teller in uniform to handle the transaction for you. The money is also sent almost instantly to the seller’s wallet.

What is a Bitcoin
Bitcoin is not exactly a coin. Even if it is, it would be much smaller
Every Bitcoin transaction still needs to be verified and controlled. With the absence of banking system, there must be another method to make sure that the currency is always in healthy distribution. Millions of computers connected to the Internet work simultaneously to help process Bitcoin transactions all over the world. Even you can contribute to this process as long as you have the necessary computer hardware and software. There are some hardware pieces in the market designed specifically for the sole purpose of handling and verifying Bitcoin transactions. It costs money and electricity to purchase and run the hardware in the first place. The software is thankfully open-source and free to download.

Every computer that helps the transaction-clearing process is rewarded with some Bitcoins. When Bitcoin was first launched in 2009, the reward was 50 Bitcoins per transaction. However, the figure is scheduled to fall by half every four years. It fell to 12.5 in 2016 and will fall again to 6.25 in 2020. This is why the procedure is called mining and the computer who does the job is referred to as miner.

You will think that mining is an unbelievably profitable proposition considering that a single Bitcoin value is currently more than $17,000 (Dec 8, 2017). However, to make it financial sensible you need to purchase a dedicated mining rig and spend more money on insane electricity bill. In 2009, you probably would be able to do a competitive mining with your lame-spec desktop computer, but as every transaction grows more difficult to complete over time, it requires blazing-speed hardware specifications and around 250kWh of electricity - the same amount of electricity enough to power a small home for about 10 days – and that is just for one transaction. Bitcoins used for rewards for mining are new money created out of thin air. Total number of Bitcoins will not exceed 21 million, while around 16 million have already been mined.

Digital Currency

First you must understand that digital transaction is different from digital currency. Digital transaction mostly refers to online method of transferring money from one party to another. Think of an online store where you purchase cleaning solutions for the dentures and spray paint for the wig. Every time you transfer money to the store, you still use dollars and basically ask your bank to complete the transaction. On the other hand, Bitcoin as digital currency does not have any physical form. If you see an image of a gold-colored coin stamped with a capital letter B decorated with two falling strokes at the bottom and top, it does not represent any physical form of Bitcoin. That is just an image somebody created to illustrate the currency.

You can earn Bitcoins by mining or simply buying it from someone else. There are many online services that provide easy method to trade your dollars with Bitcoins. Some services even have escrow feature to give the peace of mind. Many people buy Bitcoins as a form of investment, which really does look dreamy with the current value. This is a digital currency, so there is no physical money associated to it unless you trade it first, by selling it to buyers.