What is Bitcoin

The Nuances of Bitcoin Explained

Bitcoins among all the cryptocurrencies have been fairly successful in generating considerable curiosity ever since its inception. However, perhaps it’s the news of this currency reaching an unimaginable $16000 in December 2017 that propelled it right to the centre of attention as far as the world of investment is concerned. The highly volatile nature of digital currencies – perhaps has been aptly demonstrated by bitcoins this year. While it started off the year with a paltry $1000 (it was below $1000 in January), it reached $16,000 in December. On November 29, notably, it had touched $11,377.33 – only to lose more than a fifth of its value the next day.

Strangely enough, the currency which has been widely embraced by the likes of Expedia, Shopify and Overstock.com still remains to be comprehended in its entirety by many. While confusion and fallacies abound, here in this particular post we look forward to answering the most common questions regarding bitcoins. What are these coins all about? How do they work? Are they regulated? Who regulates them? Who decides their value? Documented below are details.

What are bitcoins?

Very simply known as computer money or digital currency, bitcoins were established in the year 2009. The identity of creator, Satoshi Nakamoto is shrouded in mystery as well. The repeated use of the term – “digital currency” – must have told you by now that there are no physical coins in the picture. The transactions backed by bitcoins are carried out via cloud. The balances are maintained in public ledger on cloud.

The concept digital currency of course becomes clearer once you start unraveling the way it works. Backed by tremendous computing power, bitcoins remain one of those initial digital currencies that utilized peer-to-peer lending in a bid to aid instant payments. Since there are no physical transactions involved as such, the user is required to send payments electronically. This form of digital currency is transferred (i.e. bought and sold) via the computer network. As against traditional currencies, bitcoins are not regulated by a central bank or government or an individual.

Bitcoin Mining

Behind the creation of the bitcoins are the miners. The process called mining is employed to create bitcoins and anyone with the required computing power can actually go on to become a miner. These miners are largely responsible for backing the credentials of the bitcoins at the first place.

Who decides the value of bitcoins?

As has already been indicated above, there is no central authority governing bitcoins. The miners receive the bitcoins at a fixed rate which keeps on declining periodically. Generally one bitcoin is divisible to 8 decimal places. If required, bitcoins can be made divisible to even more decimal places —- however, this change must be endorsed by the participating miners as well. The smallest unit of bitcoin is called Satoshi. People bid on bitcoins every day. Its value is very simply determined by the number of people bidding for it—the higher number of bidders the higher the value.

What Does the Absence of a Governing Authority Mean?

The absence of a centralized authority controlling bitcoins shouldn’t be equated with the lack of an organized structure dictating transactions. Miners are nothing but highly refined computer software and hardware required to make sure that the same funds are not spent more than once. Each bitcoin transaction – thus carried out by you is attached to data. The bitcoin network is responsible for combining this data associated with multiple transactions to pave the way for a puzzle. The database where the transactions are stored is known as a blockchain. The miners responsible for verifying the block of transactions (i.e. they aren’t spent twice) receive a reward of 12.5 bitcoins. For every 210,000 blocks thus mined, the reward for mining blocks is actually cut into half.

The Euphoria and More

The frenzy surrounding bitcoins is primarily dictated by its power to facilitate anonymous transactions. You can transfer money anywhere across the world and still stay anonymous. The absence of a central authority doesn’t render it questionable as well. There is no need to regard it as a Ponzi scheme. Ponzi schemes are mostly run by people who want to pay their old investors through their new ones. Most of the times they are selling you nothing but air. However, with bitcoins there is no such preposterous possibility. You are getting bitcoins when you are buying bitcoins and spending them on purchases (of products and services) made from well-known sites like Expedia or Shopify (and others as mentioned above).

The hike in bitcoin value will eventually be followed by a slump – as has been opined by the most renowned financial experts (including Warren Buffet) out there. Since there is nothing tangible at the helm of things as far as cryptocurrencies are concerned (it is created by computers and maintained by volunteers or miners), there will eventually be a time when bidding will slow down leading to the plummeting value of bitcoins. The world has already been witness to what high volatility can lead to in this context. We have intimated you how price fell in just one day this year in November. There was a similar price drop noticed in the year 2013 as well when its value dropped from $1,150 to below $500!

Photo by George Frey/Getty Images

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