What is Bitcoin? a Laymans view
Posted on April 13, 2014.
Needless to say there are a large number of people who know little about bitcoin. When I mentioned bitcoin to a friend today, who is an I.T network engineer he was asking me “what actually is bitcoin”?
When I explained bitcoin is a program it was obvious that he was not aware of bitcoin as a program. If someone In the IT world doesn’t know what a bitcoin is then it occurred to me there must be many people out there who don’t belong to the IT world in the same boat as my friend.
Bitcoin “The Program”
Bitcoin is a program that is claimed to have been created by Satoshi Nakamoto. It is a piece of computer code that was written with the intentions of producing in theory a way for us to transact a piece of data securely from one computer to another. Now you’re probably thinking, but surely someone has already invented this before? What makes bitcoin and other crypto currencies special is that to send a bitcoin to another computer it uses other computers that are in the network to verify the transaction. Along the way to the receiver of the bitcoin it can go through multiple computers to what’s known as confirmations of the transaction. These computers acting as the confirmations are called nodes but lets just call them the confirmations to keep things simple. Once a transaction has gone through at least 8 confirmations, it is considered a confirmed transaction, you can wait for more confirmations before you are satisfied yourself if you wish but 8 should suffice.
Now it doesn’t really matter who created the code, later on it was edited and cleaned up by a group of programmers who then became the Bitcoin Foundation. A foundation for the good of promoting and teaching people about bitcoin. The key is that the program was written in a way so that there is nobody in complete control of the virtual currency that it has become. Once the program was out into the world it was self sufficient providing there were miners to mine the bitcoin.
What are Bitcoin Miners?
Miners are the auditors of the bitcoin transactions and they are responsible for confirming the transactions that move from computer to computer creating a confirmation or verification that the transaction is authentic and part of the bitcoin program or network. They act as a time stamp for the transaction and as the transaction moves from confirmation to confirmation each one has the previous time stamp acting as verification of the transaction. Miners get paid for confirming your transaction, which is a small price to pay and generally less than 50 cents or we should say 50 cents worth of bitcoin. Meaning only the person receiving the bitcoins actually pays a transaction fee because it is deducted from the amount of bitcoins that are sent.
All transactions for Bitcoin are recorded in the blockchain
An interesting point to note, is that the first ever transaction is recorded in the Blockchain which is as I just mentioned, the public view of the ledger of accounts for each and every transaction for bitcoin. These transactions that appear in Blockchain do not show any personal information for those making the transaction other than IP addresses of those transacting the bitcoins. Therefore you know that your personal information is quite safe when sending and receiving bitcoins and its not out in the public domain.
What are Bitcoins?
Bitcoins are not bank notes, cheques, precious metals etc, there is an ongoing debate as to whether a bitcoin is real money. At the moment with a market capitalisation just over five billion dollars we believe its fair to call bitcoin a commodity rather than anything else. It currently has an intrinsic value because therefore we feel its unfair to call it nothing more than a code going from one computer to another.
Let’s face it the money we see printed by a country is nothing more than letters and numbers etched onto a piece of paper. True to say they are backed by a government of that particular country and generally accepted by banks, but some people beg to differ and suggest that this is the real problem with money and our global economy right now. It is who controls the money supply, controls the economy for that nation or even the worlds economy. The banks have most control over the money supply around the world. And is it fair to say that if the banks get concerned about the economy they tighten the money supply around the world to ensure their bank stays afloat. i.e they increase interest rates, but often this in turn squeeze working class people out of their homes through repossessions as can be seen in previous global economic crisis that haunted every one of us. The economical system has merely setup and become such a way and it is no fault of anyone in particular. Perhaps bitcoin can change that for the better.
Bitcoin has no controller
Bitcoin and other crypto currencies however can not be controlled because there is no controller. You can open a computer and install a mining software on your machine and mine for bitcoins if you want to create more. The more powerful your computer is the better chance you have of mining bitcoins. But do not be fooled by this statement because, the more computers you add into the mix of mining for bitcoins, actually decreases your chances of mining more bitcoins.
Why do people mine for Bitcoins?
In fact nowadays there are so many people mining bitcoin on their computers that it has become almost impossible to mine a single bitcoin in a whole year using a home computer. Instead people join mining groups where they can join their computers processing power with other computers and increase their chances. They then share the bitcoins among the pool of miners. The miners take transaction fees for processing the transactions in bitcoin, normally it’s anywhere from 6 to 50 cents per transaction depending on the size of the transaction. This is their payment for confirming the transaction. Don’t worry they don’t sit there waiting for your transaction, this is all done in the background with mining software.
Around the year 2040 the number of bitcoins that can be mined will reach its limit of 21 million and no further bitcoins will be able to be mined, but of course bitcoin is not the only crypto currency in the world.
At the time of writing this article bitcoin is around the 450 US dollar level for one single bitcoin. Do not despair if you can’t afford to buy one bitcoin. You can buy bitcoins 4 decimal places down so you could buy as little as 5 US cents worth of bitcoin if you want t0 start small.
The potential beauty of bitcoin is that if there is no controller of it then there is no automatic trigger to squeeze the economy by starving money supply, so in essence bitcoins could potentially offer equality of wealth. Whilst the idea is great to dream about, it is unlikely that poverty will be eradicated but maybe an opportunity for more people to have access to money could create a more stable economy.
We didn’t write this paper to give you all the answers on bitcoin, only to open up your thoughts on bitcoin and what it could offer in the future of our economy.
So there you have it, in summary bitcoin is a virtual currency just like the internet is a virtual world but most people take what’s on the internet more serious than what’s written in the laws of physics. It’s catching on quick so you should probably read our article on creating a bitcoin wallet and buy yourself a few dollars worth.
If you haven’t already done so, you can register your email for free to get more tips on bitcoin at www.surebitcoin.com