What is a Bitcoin?

Bitcoin in its simplest form is a piece of digital information that represents a monetary value. To us mere mortals it might just look like a row of jumbled up letters. But in certain ways it is a similar principle to the one that says a piece of metal with £1 stamped on it is worth something (we’ll address the specifics a little later).

The difference is Bitcoin doesn’t exist in a physical form; only a digital one. You keep your Bitcoins in a virtual wallet on your computer or smartphone, using a type of Bitcoin “wallet”.

The value of that wallet belongs to you and when you want to use it, you and the vendor of the item or service must both agree the Bitcoin has a monetary value, and how much you need to pay. Importantly, despite its virtual form, you can spend Bitcoin for both online and offline goods and services simply by using connected devices like a smartphone. That’s what makes it such an exciting prospect.

Now what determines ‘monetary value’ is quite complex. Bitcoin has no central bank like regular currencies. Its value is determined by market forces, influenced by people’s own behaviour around Bitcoin such as how much they buy and sell with it, and how much Bitcoin is in demand (in exchange for other currencies) against the amount of Bitcoin in supply. Trust is also a big factor, as traditional banking systems require a trusted 3rd party to observe transactions between two strangers. However, with bitcoin, there is no need for a 3rd party because it behaves like cash or gold. When you give it, the other person has it, and that’s that!

How does it work?
To understand the workings of Bitcoin, you need to understand the three commandments of Bitcoin.

It is decentralised. There is no central bank such as the Bank of England. No one person, single body or Government is in control of it. Bitcoin is instead a system that runs by harnessing the power from across a global network of people’s computers that have elected to run the Bitcoin software.
It is transparent. There is a public ledger of every transaction that has ever happened since the beginning of Bitcoin. Yes, you really can see it.
It is largely unregulated. Certainly not in the way traditional currencies are. There is emerging regulation for businesses that use Bitcoin, however many of these (especially outside of the US) are still in very early stages. At the end of the day, Bitcoin today is still mostly controlled by the complex mathematical constructs that underpin it, and somewhat indirectly by agencies that control industries that affect its commercial success (e.g. bank regulators).
This last commandment is a point of much contention. It means Bitcoin is essentially beyond government confiscation. The people behind Bitcoin’s libertarian roots argue that Bitcoin should remain unregulated and completely free from any government intervention.

The people supporting regulation say that Bitcoin is too powerful and a tool that criminal and terrorist organisations can easily abuse because it is essentially anonymous (or pseudonymous, if you want to get super-specific). You only really have an ID, and depending on how you use Bitcoin, it can be very difficult to track back to a real identity.

Regardless of where people may stand on this issue, Bitcoin is moving closer to commercial credibility with developments like the recent ruling by the European Court of Justice recognising it as a currency and saying exchange trading of it should be exempt from VAT.

So how do you get your first Bitcoin and pay with it?
Imagine you’re hungry and you want to buy a burger. Back in 2013 there was a Bitcoin-friendly burger van parked up in London selling burgers for about £7.50, or 0.0131 BTC at the time. Let’s assume the van is out today, and you want to go buy the burger.

First you’ll have to get yourself some Bitcoin! To do this, you’ll need the following:

Some money in your bank account, let’s say £10
Proof of identity
Proof of address
You will then go to an established Bitcoin exchange like Coinbase or Bitstamp, and register for an account.

You will need that proof of identity and address to get the account activated, just like you would for a normal everyday bank account. This is because any “serious” exchange will want to play ball with established financial institutions and government by complying with money transfer laws. These involve things such as Know Your Customer (KYC) and AML (Anti Money Laundering) processes to help prevent criminals from doing things those things they shouldn’t be doing with Bitcoin.

You will then transfer the £10 into your new Bitcoin account and once this transaction is confirmed by the system, you can use it to buy Bitcoin.

A great thing about Bitcoin is you don’t have to buy 1 whole Bitcoin. The smallest fraction of a Bitcoin you can buy or pay with is 0.00000001 BTC – a hundred-millionth of a Bitcoin!

So now you’ve exchanged your £10 for 0.0406 Bitcoin (as per the exchange rate of 1 GBP = 0.00406 BTC, at 11:56 UTC on 6 November 2015).

But before you can use it, there’s one more step: getting a Bitcoin wallet! A Bitcoin wallet is simply a piece of software (for example, an app) that allows you to store and use your Bitcoin. You can see some examples here.

Technically, a Bitcoin wallet is really just a collection of bitcoin addresses. The wallet could be software, hosted online or unhosted (ie. offline), connected or unconnected (e.g. on a USB stick or CD), or it could even be written in crayon on the back of a napkin.

But once you have a Bitcoin wallet, you transfer the Bitcoin from your Bitstamp (the exchange) account into your Bitcoin wallet, and you’re good to go! Ideally for our example, you will have installed the Bitcoin wallet app on your phone.

Now you head to that burger truck, open your Bitcoin ‘wallet’ on your phone, scan the funds over at the till, grab your burger and walk away.

This transaction is now randomly sent to someone in that global network. Let’s call this guy Bob. Bob is one of the people running the aforementioned Bitcoin software on his computer. He chose to run this software, and has therefore elected to make sure your transaction checks out – in other words to validate it. This validation is very important to make sure no one is cheating the Bitcoin system. In fact, your transaction will probably be validated more than once by people like Bob, just to make extra sure it makes sense – though this does mean it’s slightly less than an immediate process. But more on that later…

Is making a transaction safe?
Bitcoin is often referred to as a cryptocurrency. This means it is a digital currency that uses cryptography to make it work. Cryptography involves storing and transmitting information in a particular form so that only those for whom it is intended can read it. One of the ways is through encryption. Encryption takes a piece of information on your computer, and then jumbles it up beyond all recognition. Once that jumbled up information is sent somewhere else, and only the computer containing the right ‘key’ to un-jumble it can make sense of it.

The use of cryptography in the Bitcoin network is an essential part of validating transactions, in other words one of the things making it incredibly difficult for some naughty hacker to tamper with them. It stops Bitcoin from being intercepted, duplicated or stolen when Bitcoins when they are travelling through the bitcoin network.

But it is still up to you to keep access to your Bitcoin wallet secure. You need to keep your password and any other security measures secret – much like you wouldn’t go waving your physical wallet around in public!

Why use Bitcoin?
The original ideology comes from the minds of those who created Bitcoin due to being disillusioned with the Government-regulated economic and monetary system.

But the three main reasons why more and more small businesses are accepting Bitcoin are that transactions are virtually immediate, irreversible (ie. there are no so-called chargebacks and transactions are final) and the drastically lower transaction fees.

For example, every time you pay with your credit card, your credit card provider will charge the business you are buying from a small transaction fee (usually around 2%, but this may vary greatly).

By contrast, the person whose computer is processing your transaction – within that global network we spoke of – will on average only take 1 thousandth of a Bitcoin (0.0001 BTC) as a transaction fee, and this fee can be much lower or even free for small transactions. For many businesses this can make a significant saving. And for those powering the system, it creates an incentive/reward for helping out.

Making sure it’s legit
Digital information is super easy to copy – just think how easy it is for you to duplicate a file on your computer! The validation process I spoke of a few paragraphs earlier makes sure that you’re not trying to pay for that aforementioned burger with Bitcoin you already spent on that private jet the other day.

If you were trying to cheat the system and use the same Bitcoin twice, the ledger would not accept your transaction. The maths wouldn’t make sense, and the latter transaction (otherwise known as the burger) would be rendered invalid.

Remember Bob? What’s in it for him to validate it? Well, every time he validates a transaction and adds it to that public ledger for all to see, the Bitcoin system pays Bob with brand new, freshly minted Bitcoins. This in Bitcoin-speak is also known as mining.

You pay Bitcoin, he earns Bitcoin, and all those little validation payments soon add up as he – and others – send a whole bunch of validated transactions to the ledger. This, in other words, is adding a block to the Blockchain.
source /freeformers.com/