The open source, peer-to-peer digital currency, Bitcoin is quite different from traditional banking. What exactly is bitcoin?
Bitcoin is a type of digital most commonly defined as a virtual, or crypto- currency. Bitcoin was created by Satoshi Nakamoto in 2008 by publishing this payment system in a whitepaper and released as open-source software in 2009. The bitcoin is peer-to-peer system, it means that transactions take place without the need for a third-party. These transactions are then collected in a public distributed ledger called the blockchain, which uses bitcoin as its unit of account.
Bitcoin system is decentralized and there is no single person or organization who owns the currency, because bitcoin is based of the blockchain technology, which used as a financial ledger without any trusted central authority.
With every new transaction, recordings are added as ‘blocks’ in a linear and chronological order. The blockchain looks like the full history of banking transactions, where the blocks play role of individual bank statements. The most interesting is that Bitcoins do not physically exist, but on the contrary they are only records of these transactions and balances.
Bitcion, what is not surprising, is a unit of currency in the bitcoin system. Bitcoins can be fission into another units such as millibitcoin (mBTC), microbitcoin (µBTC) and satoshi. Satoshi is the smallest possible amount, which equals one hundred millionth of a bitcoin. Satoshi, as you can see, named in honour of the bitcoin founder.
Bitcoins nowadays used not only for purchasing at bitcoin exchanges but also as payment for a service or goods.
To earn Bitcoins is quite easy, all you need to do is to help process payments into the distributed ledger by offering compute power to verify and record payments. Bitcoins are created as a reward for this services which is known as bitcoin mining. However bitcoin mining is not unlimited, miners can only ever create 21 million of bitcoins and no more.
The value of bitcoin rests on supply and demand of the currency. It means that, when bitcoin demand increases its price increases too. And contrariwise when demand on bitcoin falls the value of the currency does the same. Bitcoin demand must follow the level of inflation to ensure stability, because of the fact that bitcoin is in limited circulation and new bitcoins are created at a predictable rate. Bitcoin is still a small market, so it does not need the huge amounts of money to move this market – this means that the currency is still very unstable.
You need to have and address for starting with bitcoin. You can get it with the help of bitcoin exchange account or other online bitcoin wallet services or by running bitcoin wallet on your own computer. The address used as the destination for a bitcoin payment.
For buying and selling bitcoin, you can use a digital wallet. A digital wallet stores all the necessary information needed for bitcoin transaction. Bitcoin system uses public-key cryptography technology, where generated one private and one public. So, this digital wallet can be representes as a collection of these keys.
Each transaction is digitally signed for security. So to make a transaction you need a bitcoin address, which is randomly generated and a private key, which remains the secret information in his numbers set.
The private key is also used to send the key information as:
The bitcoin address which was used to send the bitcoins to you
The amount of bitcoins you wish to send
The bitcoin address of destination
The three bits of information are sent to the general bitcoin network from your bitcoin wallet. Then with the help of miners going a verification process and recording the transaction by putting the completed block into the ledger. Whereupon the payment is completed.