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BITCOIN – A New Kind of Money

Bitcoin

Credit: www.ybitcoin.com

Bitcoin- A new kind of money

Bitcoin is the subject matter of the underground web technology that remains inaccessible to conventional search engines and consequently to most users of the Internet. According to researcher Marcus P Zillman of DeepWebResearch.info, as of January 2006, the underground web contained around 900 billion pages of information; in contrast with Google, the largest search engine had indexed just 25 billion pages. The figure makes it clear how deep the deep web is.

Bitcoin is the electronic cash as was named after its inventor Satoshi Nakamoto, who published it initially in 2008 and made the software open source in 2009. The inventor is said to be from Japan but his mail ID was from Germany, moreover, the bitcoin software was not available in Japanese. He developed the system and made it publicly available but disappeared into thin air in 2010. It is often referred to as the first cryptocurrency. The bitcoins are created through Computer Processing and GPU (Graphics Processing Units) compression through the open source software.

Unlike the traditional currency, the bitcoin system is based on the software that use a mathematical formula to produce bitcoins. Both the formula and the software are available to the public at large so that anyone can check it and make sure that it does what it is supposed to do. One of the most important characteristics of bitcoin, which makes it different from the normal currency is that it is decentralized. It means that no single power or authority controls it and regulates it. Bitcoin network works with a community of people that anyone can join; wherein bitcoins are mined, using the computing power in the network. The bitcoin network can work correctly only with the complete consensus among all the users. Therefore, all the users have a strong incentive to protect this consensus.

The Bitcoin protocol – software that makes bitcoin system work say that only 21 million bitcoins can ever be created by miners. However, these coins can be divided into smaller parts. The smallest divisible amount is one hundred millionth of a bitcoin and is called a ‘Satoshi’, after the founder of the Bitcoin. Some of the important characteristics of the bitcoins include the following

No Central Command

The Bitcoin network is often considered similar to an Email, the technology behind which isn’t owned by anyone. There is no single entity in charge of it. This implies that no one can stop you from transacting with anyone, anywhere in the world. Freedom comes with its own concerns, as there is no one to approach if anything goes wrong.

Bitcoin Price

The price of owning a bitcoin is determined by the general forces of market demand and supply. As the supply is limited to 21 million bitcoins, with the increasing demand forces the prices to go up. Also, as the use of Bitcoin is still in the development stage, this may cause the price in terms of traditional currency fluctuate significantly; but will surely increase.

Bitcoin Anonymity

It’s not completely anonymous in the sense that all the transactions are stored on a public ledger known as the blockchain, which may make people link your identity to a transaction over time. Also, the public ledger shows only the transaction ID and the amount transferred. The anonymous arises because no personal details are to be provided. This may make a single user to hold multiple bitcoin addresses. To improve privacy, a user may use a new Bitcoin address every time a transaction has to take place.

Bitcoin Exchanges

Bitcoin Exchanges facilitates the buying and selling of bitcoins. The transactor may take an arbitrage position if the difference between the exchanges is too great. Exchanges that have substantially different prices than other exchanges, it should be avoided.

Bitcoin Mining

Mining is the process of adding transactions that have ever taken place to a public ledger, called a Blockchain, as it is a chain of blocks. Only once the transaction has taken place, it is recorded in the public ledger. Bitcoin miners are responsible for the verification of the transactions and use the hash cash proof-of-work function. The authenticity of each transaction is protected by the digital signatures corresponding to the sending addresses and thus allowing all users to have full control over sending bitcoins. New coins are also introduced in the system through mining. Transaction fees, if any and subsidy of newly created coins is paid to the miners. This motivates people to provide security to the system.

Irreversible Payments

Utmost care has to be taken while transacting on bitcoin system as the transactions once issued cannot be reversed back unless the person receiving refunds it. Thus business should be done with those whom you know and trust, or who have an established reputation. Also, the system is such which won’t let you send money to an invalid address by mistake.

Bitcoin Wallet

It is a digital wallet where one can store their bitcoins and can transact with them. An individual can have as many wallets and bitcoin addresses as they like. It is better if the user is in charge of the private keys required to spend the bitcoins or else you are completely at others mercy regarding the spending of your bitcoins. It is also advised not to hold a lot of bitcoins in a wallet and divide them into several smaller wallets.

Freedom to choose fees

In general, no fees are charged to transact in bitcoins. But the payment of fees guarantees faster confirmation of the transaction. Fees are unrelated to a number of bitcoins transferred which implies that the number of bitcoins transacted won’t make a difference.

Some of the benefits of bitcoin system include the following:

  • Negligible transaction costs.
  • No higher authority interference.
  • The worth of the bitcoins is increasing day-by-day.
  • Even international payments are made easy and fast.
  • Most prominent triple entry book-keeping system in existence.

Great features always come with great security concerns. Some of the issues with the system are as follows:

  • As there is no command of anyone, this may lead to increase in malpractice by the group of people.
  • The increasing volatility in prices due to the limited supply of the bitcoins.
  • There is no reverting back of money.
  • There is a certain amount of anonymity and you actually don’t know anything about the third party.

All I can say is there is an unsettled debate about the future of the bitcoin and it is still an experimental currency that is in active development.

Pic Credit: Credit: www.ybitcoin.com
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