Video: What is Bitcoin? (v2) (Source: YouTube-WeUseCoins)
Rupee, Dollar, Euro, Pound, Yen are printed currencies and it’s certain that you might have one of them in your wallet. It’s also obvious that you could have traded them for goods and services. But, how will you react if I say that there exists a currency which you cannot see?
This virtual currency which can only be stored electronically is called Bitcoin. It’s called a coin but it’s neither a coin nor a note. Main difference between normal currencies and Bitcoin is – there are institutions or governing bodies which control or regulate these currencies. But in case of Bitcoin, it is decentralized i.e. No single institution governs the bitcoin network.
So, who created it?
Satoshi Nakamoto, a software developer, proposed Bitcoin. The whole idea was to produce an instantly transferable independent currency. Bitcoins are generated by community of ‘miners’ (which anyone can join). Talking about the transaction in conventional currencies, there are few checks which a bank does before processing a transaction, like –
- Creating and storing a proof of the payment,
- Does the sender actually have the amount he is sending?
- Is sender the real owner of the money? Or confirming the identity of the sender.
Similarly, a bitcoin transaction having details like – Sender’s ID, Receiver’s ID and the Amount, is converted into a cryptographic message (a math puzzle) by a hash function and is sent to entire network of miners for verification. Here, these checks are attempted by all registered miners instead of one bank. ‘Miner’ who solves that mathematical puzzle first, gets extra Bitcoins for verifying the transaction. This process of generating bitcoins is known as ‘mining’.
According to a Bitcoin protocol there can only be 21 million bitcoins that can ever be created by miners. However these coins are divided into smaller parts and smallest part is one hundred millionth of a bitcoin. After transactions are verified, they are recorded in the transparent public ledger called ‘Blockchain’. This also means that all of the miners record and maintain all of the transactions at the same time i.e. have access to that public ledger.
Bitcoins are transferred from person to person, without going through any bank or clearing house. This means, fees of exchanging bitcoins is much lower than exchanging conventional currencies. Also, bitcoins can be used in every country and your bitcoin account can never be frozen. Lastly, there are no pre-requisites or arbitrary limits to use it.
Bitcoin opens up a whole new platform for innovation as the software is completely open source and anyone can review the code. It’s changing the entire finance in the same way internet changed publishing. If everyone has easy and affordable access to a global market, great ideas flourish. It’s a great way for businesses to minimize transaction fees. It doesn’t cost anything to start accepting them. The system is easy to set up plus you get additional business from the Bitcoin economy.
Originally Written by Saurabh Arora
Saurabh Arora is currently pursuing PGDM at Great Lakes, Chennai. He was a Corporate Trainer at Infosys and carries a rich experience in technolgies managing IT infrastructure. He did his summer internship at JP Morgan. Follow him on Twitter @Saurabh_Xtro