Bitcoin was founded in 2009 by an individual or a group of mysterious under the pseudonym Satoshi Nakamoto, who has not revealed her true identity and who left the project in 2010. It rocketed to prominence in 2013, when the value of the Bitcoin jumped more than 10-fold in a period of two months, from $ 22 in February to a record $ 266 in April. At its peak, based on more than 10 million Bitcoins issued, cryptocurrency boasted a market value of more than $ 2 billion. Bitcoin Currency Versus Conventional Bitcoin currency is different from the conventional in some very basic things, as listed below (for the sake of simplicity, we using the U.S. dollar as a proxy for conventional currency).
- Bitcoin uses P2P technology with no central authority: Bitcoin is a decentralized currency managed by technology peer-to-peer (P2P) (2) , without a central authority. All functions such as issuance of Bitcoin, transaction processing and verification is done collectively by the network, with no central supervisor or agency to oversee the operation. In contrast, conventional currency issued by the central bank as part of its mandate to manage the national monetary policy. In the U.S., the Federal Reserve only has the power to issue a dollar, but also the central authority who conduct monetary policy, bank supervision, maintain the stability of the financial system and provide financial services to depository institutions.
- The main Bitcoin digital : Although physical Bitcoins are available from companies such as Casascius and BitBills, Bitcoin has been designed primarily to be a digital currency. Physical Bitcoins bit of a novelty, and the idea of the real shape of defeats the purpose of digital currency, according to the most ardent supporters of the concept. Instead, your dollars there, especially in the physical form, balance you hold in your bank and online brokerage can be converted into physical dollars in a few minutes if you want.
- Bitcoin has a maximum of 21 million: The number of Bitcoins that will be issued is capped at 21 million. The Bitcoin "mining" (3) the current process creates 25 Bitcoins every 10 minutes (the amount made will be halved every four years), so that the limit will not be reached until the year 2140. While Bitcoin critics argue that the limit is not large enough, supporters maintain that because every Bitcoin is divided to eight decimal places, the number of Bitcoins fractions (called "satoshis") - at 21 x 1014 - will be more than enough for all conceivable applications. Conventional currencies, on the other hand, can be issued without limit.
- Bitcoin is a complex product: cryptocurrencies concept in general is abstruse and abstract, and understand how and why Bitcoin work requires a level of technological knowledge.
- Bitcoin has limited acceptance: It has limited acceptance so far and can not be used in front of the stores brick-and-mortar, though that may eventually change if it continues to gain traction. The dollar, on the other hand, has almost universal acceptance as a global reserve currency in the world.
- Bitcoin transactions has limitations: Bitcoin transactions can take as long as 10 minutes for confirmation. Transactions can also be modified and can only be returned by the recipient Bitcoin. This limitation does not exist with conventional currency, in which debit and credit transactions confirmed within seconds, certain transactions may also be returned for valid reasons by the originator, without having to rely on the generosity of the receiver.
- Bitcoin balances not covered by insurance: This means that if you lose your Bitcoins for any reason - for example, a hard drive crash, or hackers stole digital wallet where your Bitcoins are stored, or where you hold a Bitcoin exchange balance goes out of business - you have a little way . Eyes balances held at banks, on the other hand, are insured against a specific event such as the failure of banking business by agencies such as the Federal Deposit Insurance Corporation in the U.S.
Let's say you want to test the waters Bitcoin. The first thing you need to do as a new user is installing a digital wallet on a computer or mobile device. This wallet is just a free program open-source software that will produce the first Bitcoin address and your next. There are three types of purses - wallet software (installed on your computer), mobile wallet (which are on your mobile device) or a wallet site (located at the service provider site that hosts Bitcoins).
Bitcoin uses public key encryption (4) techniques for security . This means that when a new Bitcoin address is created, a cryptographic key pair consisting of a public key and a private key - which is essentially unique, long string of letters and numbers - is produced.
Bitcoins Each address has its own balance, so all you need to do is get a number of Bitcoins which will be held at one of the addresses in your wallet. You can get Bitcoins in several ways - by buying them from Bitcoin currency exchange as Mt. Gox or Bitstamp, or through services like BitInstant which allows the transfer of funds between the central Bitcoin and supports a variety of payment mechanisms.
Notice that all Bitcoin transactions are stored permanently in the public and Bitcoin network, which means that the balance and transaction Bitcoin address can be seen by anyone. Experts therefore recommend that owners Bitcoin create a new address for every transaction as a way to ensure privacy and enhance security.
Once you make Bitcoin address and have obtained Bitcoins, you can use it for online transactions with companies that accept Bitcoins as a payment method. The company will send Bitcoin address that you can send your Bitcoin payment. You direct the payment to the address, while the transaction took place in a matter of seconds, the verification can take 10 minutes or more.
All Bitcoin transactions, without exception, is included in the transaction log with the public known as "chain block". This is to confirm that the parties spend Bitcoins actually have them, and also to prevent fraud and double-spending.5
Why transaction verification or confirmation takes so long? Due to the complex algorithms involved in Bitcoin mining (see below) take time to complete, even with the enormous computing power at one's disposal. Bitcoin Transaction Example Let's assume that you want to make a payment online to the company - call BitChamp - using 5 Bitcoins do you have in an address in your digital wallet. Here are the steps in the transaction:
- BitChamp create a new Bitcoin address and direct you to send your payment for it. This creates a private key (known only BitChamp) and public key (available to you and others). Note that just as the seller does not need to know the identity of your physical if you pay cash, you do not need to reveal your identity to BitChamp and can remain anonymous.
- You instruct your Bitcoin client (first Bitcoin free software installed on your computer) to transfer 5 Bitcoins from your wallet to the address BitChamp. It is a transaction message.
- Bitcoin client you will electronically "sign" the transaction request with the private key of the address from which you are transferring Bitcoins. Remember that your public key available to anyone for signature verification.
- Your transaction is broadcast to the Bitcoin network and will be verified in a few minutes. The 5 Bitcoins have successfully moved from address to address BitChamp.
- As cryptocurrency first caught the public imagination, Bitcoin has a "first mover" advantage and a head start over the competition.
- The issuance of a limited number of 21 million, making it impossible to devalue because of the prospect of a large flow of new Bitcoins.
- As a decentralized currency, Bitcoin free from government interference and manipulation.
- Transaction costs are much lower than the conventional currency.
- Bitcoin prices which have more stable, making it difficult to assess the real value and increase the risk of loss for investors in the cryptocurrency.
- The relative anonymity of Bitcoin may encourage its use for illegal and illicit activities such as tax evasion, procurement of weapons, gambling and evasion of currency controls.
- The fact that Bitcoins exist primarily in digital form makes them vulnerable to loss.
Bitcoin has made significant progress in the adoption and use since it was established in 2009. Its evolution over the next few years will determine whether the leading cryptocurrency will be an integral part of the global financial system, or whether it is destined to remain a niche player. Definitions and Key Concepts (1) Cryptography refers to the practice and technique of using encryption for communication safe and transmission of data and information. (2) In a P2P network , a group of computers connected to enable the sharing of resources and information by the user, and there is no central location for networking. This is contrary to the client-server network is typical, where a central server to control user access levels to a shared network resource. Popular applications of the concept of Skype and P2P file-sharing services such as BitTorrent. (3) Bitcoin mining refers to the computation-intensive task of generating Bitcoins. While any computer can be put to the task of mining Bitcoin mining using a free app, in fact a lot of computing power needed to solve very complex algorithms involved and share their solutions with the entire Bitcoin network. Mining process is quite complicated and involves advanced concepts such as cryptographic hashes and nonces. In simple terms, Bitcoin miners use powerful computers to track and compile every Bitcoin transaction is delayed 10 minutes into the new block. The miners then start doing intensive work the numbers necessary to verify all transactions in the block. It is a competitive process, and the algorithm solves the first miners and verify the transaction sends the results to the entire Bitcoin network. After confirmation with the rest of the network, block and then added to the block chain. Each block has a number of Bitcoins in "coinbase" transactions paid to miners success. This prize was established in 50 Bitcoins when the system first started operating in 2009, but was halved to 25 Bitcoins in November 2012, and will reduce by 50% approximately every four years. (4) public key encryption combines public key and a private key. While the public key is available to anyone, matching private key is stored securely in the digital wallet and password protected generally. Each transaction is signed by a private key Bitcoin users get started, provide mathematical proof that it is derived from the owner's address, and prevent transactions from being changed after it has been published. Because the key pair are mathematically related, data or information which is encrypted with the private key can only be decrypted or described by the corresponding public key and vice versa. (5) double spending means spending the same money twice digital, something not possible with physical currency . Sources:
http://www.investopedia.com/articles/investing/072913/how-bitcoin-works.asp
