Bitcoin is a digital currency; its creation and transfer is based on an open source protocol encryption network that is totally independent from any central authority. A Bitcoin can be transferred by a computer or a smartphone without the use of any intervening third party or intermediate financial institution. The concept was introduced in 2008 on a white paper published by a pseudonymous programmer named Satoshi Nakamoto, in what was defined as a peer-to-peer electronic payment system. The Network was turned on by Satoshi on the 3rd of January 2009.
Bitcoin can be used for payments similarly to the dollar (or other currency). Due to the mathematical characteristics of Bitcoin, it has an immense potential due to its multi-divisible properties enabling micro values to be sent with virtually no cost. Bitcoin opens the door to many possibilities and services that have not been imagined.
Bitcoin is an efficient solution when it comes to tipping or making donations over the internet. Donations can be visible to the general public enabling a better financial solution and greater transparency for non-profit organizations. Also in Emergency situations such as natural catastrophes, donations in Bitcoin arrive faster to those in need thus reducing the international response time as well as being extremely effective as a frictionless way of value transfer.Though there are still very few initiatives, we can already see the first crowdfunding projects related to Bitcoin pop up more frequently.
Bitcoin allows pseudonymous transactions and transfer of property and other values. Bitcoins can be stored on a computer inside special software that stores the encrypted keys, or on an online wallet provided by third parties; in both cases Bitcoins can be sent over the Internet to anyone who has a Bitcoin address.
The P2P topology of the Bitcoin network and the absence of a central management entity make it impossible for any authority, government or institution, to control the distribution and issuance of Bitcoin.
How are Bitcoins created?
For the creation of this new virtual currency, an open source program connects the peers along a network built specifically for this purpose. Unlike most currencies, Bitcoin is not dependent on trust in any centralized issuer; instead it is ruled by an encrypted complex mathematic algorithm which is the main building block of the protocol. Bitcoin uses a distributed database spread across nodes of this peer-to-peer network to record transactions, and uses encryption to provide basic security functions, such as ensuring ownership, and avoiding double spending.
Basically, all bitcoin transactions are recorded on a giant ledger shared by all the network users. When someone uses bitcoin to pay for something or get paid, the executed transaction is recorded on this public ledger. The machines running the bitcoin protocol algorithm then compete to confirm the transaction by solving complex mathematical equations, and once a block is processed the machines running it are rewarded for their effort. This process is widely known as Mining.
When the network was launched by Satoshi in 2009, any computer connected to the network could effectively mine bitcoins. This was possible because there were too few people mining it and because the protocol made it to be that way. Bitcoin operates as a peer-to-peer network. This means that everyone connected to the network is helping to produce it. With paper money, governments decide when money is printed and how it will be distributed, but bitcoin is completely decentralized, it doesn’t have any central government. Bitcoin is mined using special software to solve math problems. Miners run the software on their machines and are issued a certain amount of bitcoin in return. This provides a smart way to issue the currency and also creates an incentive for more people to participate. As more people participate in mining the more secure the network becomes. The Bitcoin Network automatically adjusts the difficulty of the math problems depending on how fast they are being solved. In the early days, bitcoin miners solved these difficult problems with regular desktops and laptops but soon new hardware for mining was introduced and the difficulty became harder and harder for regular desktops to keep up with mining.
“Bitcoin is completely decentralized; it doesn’t have any central government.”
Bitcoin miners are rewarded by a new batch of Bitcoins about 6 times per hour which are distributed among miners according to their utilized computing power or “hash rate”. Everyone has the opportunity to win their share while running the Bitcoin miner software program, or third party programs. The act of creating Bitcoins is usually entitled rmining because it has some similarities with gold mining. The probability of a certain user to gain a lot depends on the processing power that he contributes to the network in relation to the processing power of all the miners combined. The amount of Bitcoins generated by batch never exceeds 50, and this value is programmed to shrink every four years until it gets to 0, so that the total set amount of Bitcoins to ever be produced will never exceed 21 million.
All miners on the network compete for the first to find a solution to a cryptographic problem involving their candidate block, a problem that requires repeated trial and error to solve. When a node finds the solution, he announces to the other nodes in the network and claims a new batch of Bitcoins. Instead of individual mining, miners can also join in groups known as “pools” and collectively mine getting back faster payouts divided by chunks.
Where can I keep my Bitcoins?
Bitcoins can be saved in a Wallet. There is software for your computer, to your smartphone and even online wallets. The wallets will allow users to save their bitcoins and to execute transactions with an operation that is much similar to sending an email.
Users can install and run a wallet on their own machines. This is much safer than a hosted wallet because, but it also carries disadvantages. It depends on how good is your password and also it is entirely dependent of user’s machine so if anything happens with the OS, the equipment or any hardware errors can compromise access to the stored Bitcoins. Since malware and viruses are constant threat, users should always have updated backups in offline devices.
Here is a small list of the bitcoin Wallet software we can recommend:
The installation process is quite simple and synchronization with the network takes only a few seconds.
There are also several applications for smartphones, but we can recommend Mycelium Wallet.
Users can also create an online wallet. There are several suppliers for this service, Blockchain, Coinbase, Coinkite, etc. The reputation and credibility of an online wallet provider should be thoroughly researched before deciding to use an online wallet.
How to earn Bitcoin?
Bitcoins can be earned in many ways. They can be mined, bought, given, won, or earned in exchange for services. The easiest way to get some bitcoins, although not the most effective, is through Giveaways or through the commonly known Faucets which offer small amounts of bitcoin from time to time.
Today, to mine Bitcoin with some profitability you would need to invest a good chunk to get things going, and in order to keep the growth you would have to keep the re-investment running throughout time. So if you’re thinking in starting to mine we strongly advise you to do your own math. You can use Coinwarz to help you with that.
Bitcoin Faucets are sites that offer small amounts of bitcoin from time to time. Currently to get something significant through Faucets is nearly impossible because these faucets limit the amount given per bitcoin address.
Lastly, you can try and be on lookout for giveaways, not just Bitcoin giveaways but also other cryptocurrencies, since you can always turn them into bitcoin simply by using exchanges.
How to buy Bitcoin?
You can buy Bitcoins in many ways. You can buy personally to someone a friend,or with the help of localBitcoins, or you can buy them through a Bitcoin Exchange.
Localbitcoins – is a bitcoin shopping service that lets the user try to find people on his vicinities someone that wants to sell buy bitcoins and then both can agree to meet personally to do the business, or they can either use the escrow service provided by the Localbitcoins platform.
Bitcoins can also be bought at several Bitcoin exchanges: Kraken,BTC-e, Bitstamp, Bitfinex – There are several other operators but these are the most reliable and rated by the community. Once you manage to fund your account,it will be very simple to buy bitcoin through exchanges. Bitcoin Charts and the bitcoin price are managed by exchanges through the demand and supply bids made by their users.
There are also some companies that are specialized in selling bitcoin by accepting credit card payments and money transfers; however, we do not advise anyone to use this type of services because of the uncertainty of their correct behavior. Furthermore, we strongly advise anyone who is interested in dealing with bitcoins to have extra caution with security issues and before making any decision be certain that you have studied very closely this decision.
Bitcoin may be one of the most secure currencies ever invented but it also can be equally insecure. So, be sure to protect your Bitcoin assets the best way you can. For more information about buying bitcoin, visit our bitcoin buying guide.