If you are a millennial, in all probability you have heard about the word ‘Bitcoin’ or surely have acknowledged the hype that follows it. But then, very few of us have actually ventured into the world of bitcoins or gotten to know it even from afar. So, here’s taking matters into our hands and jumping down the rabbit hole to know what the bleep is bitcoins!
What is bitcoin?
Bitcoin is a type of cryptocurrency that is completely virtual and digital. Although it’s almost an online version of cash which can be used to purchase products and services just like with the regular cash, yet very few establishments and institutions accept bitcoin, while some countries have even completely banned its usage and circulation.
Bitcoin is the very first of a cryptocurrency, which is now being produced by people and businesses around the globe using powerful computer software. Hence, it is not controlled by central banks or monetary authorities.
Hold up! Let’s look at the jargons first
- Blockchain – Basically your Balances!
Blockchain is simply a specific type of database. However, it is nothing like a typical database if we are to just go by the way that it stores information; blockchains store data in blocks that are then chained together. It is the shared public ledger on which the entire Bitcoin network relies. All transactions that go on with bitcoins or cryptocurrencies are included in the blockchain. In Bitcoin’s case, the blockchain is used in a decentralized way so that no single person or group has the reins of the blockchain in their hands, but all users participate in taking control of it.
- Private keys – Yeah, we mean transactions!
A private key is a secret code that allows bitcoins to be spent in a secure fashion. Every Bitcoin wallet contains one or more private keys, which are saved in the wallet file. It is an elevated form of cryptography that allows a user to access his or her cryptocurrency without the threat of theft or unauthorised access. The private key is made up of ‘seeds’, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. The signature ensures that the transaction cannot be altered by anybody once it has been issued.
- Mining – It simply means processing!
Bitcoin mining is the process of digitally adding transaction records into the blockchain. After completing a set of “blocks” of verified transactions, Bitcoin miner gets rewarded with Bitcoins. These blocks are then added to the blockchain. By mining, miners can earn cryptocurrency without having to put down any real money for it. So, mining is basically like auditing records of transactions executed through immense computing power and as an incentive, being paid for it in bitcoins.
- Coloured Coins – This is fancy!
Coloured coins are a special token that works on the bitcoin blockchain. By colouring a bitcoin, one basically attributes it with special and specific features to expand the functionality of the Bitcoin. They contain a series of instructions that are defined well within its Bitcoin Script and can only be fully understood by nodes and wallets adapted to that particular coloured coin. So to put it simply, transaction wise, coloured coins are actually bitcoins with special attributes.
But then, how does it all work?
Each Bitcoin is more like a computer file that is stored in a ‘digital wallet’ app on a smartphone or a computer. And just like real currency, you can send bitcoins or some part of it into your digital wallet or even to other people’s digital wallets.
These transactions and transfers are then recorded in what we call blockchains. This whole process of auditing through blockchains makes it possible to avoid unauthorised transactions by tracing the history of bitcoins and stopping people from spending coins they do not own, making copies of existing bitcoins or messing with on-going transactions.
There are three main ways people get Bitcoins.
- You can buy Bitcoins using ‘real’ money.
- You can sell things and let people pay you with Bitcoins.
- You can participate in mining and earn bitcoin for free
- Bitcoins can be created using a computer.
So, in order for the Bitcoin system to work, computers with highly complicated mathematical problem-solving abilities are put into use. These computers are then made to work out incredibly difficult sums and their owners paid with bitcoins. This is called mining.
Currently, the sums are getting more and more difficult and if even you started mining right now, it could take years before you got a single Bitcoin. Interestingly, you could even end up spending more money on electricity for your computer than what the Bitcoin you now mine would be worth in the future.
Hey is it safe?
Now, like all things on the internet, Bitcoins are definitely risky. No matter how hard bitcoin advocates argue and vouch for it to be completely safe with guaranteed returns, but with no regulatory body to monitor the transactions and the whole process, the whole business of bitcoin mining and trading does become kind of open-ended and ambiguous.
Well, this was just the tip of the iceberg that Bitcoin is. Yea, we’re not kidding! In the coming weeks, we will be adding to your crypto-knowledge wealth by digging deep. So stay tuned and keep an eye on this space for more Bitcoin fun-facts, latest improvements and so much more!