We have been hearing the word ‘Bitcoin’ for a while now. Bitcoin actually stands for different things for different people. In a nutshell, people can define it based on the perception they have.
While some of them think that it is the unit of free moving currency across the world, united with the central bank and the only currency that will hold value… in the future; too many, it is just a digital entity.
Even with a lot of technological advancement, people are still speculative about the Bitcoin because of the questionable ups and downs in its value and as well as the origin.
Addressing all that, what exactly is a Bitcoin, according to a layman? Analyzing all the casual conversations in our life, Bitcoin is nothing but the basic digital currency.
However, if we go into details, it is so much more complicated than that or we can say a couple or more things intertwined together. Bitcoin is basically nothing but a cryptocurrency. But, what are cryptocurrencies, in the first place?
Bitcoins – The first form of Cryptocurrency:
Cryptocurrencies are lines of computer code which hold a monetary value. These lines are usually created by electrical and high output computers.
A form of digital money, this public currency is formed by painstaking the computations and then policed by a truckload of computer users who are referred as ‘miners’.
The thing with cryptocurrencies is that there is nothing to hold, however, you can exchange the crypto with cash. ‘Crypto’ comes from cryptography and is a security process through which the transactions are protected as it sends the coded lines out to make purchases.
Cryptography also has the ability to create new coins with the specific quantity of the code. Therefore, there are just hundreds and hundreds of coins in cryptocurrency now out of which only a handful of them have the potential to actually become an investment.
Crypto, coming from the word cryptography is a security process which is used for safe transactions. This process sends the lines of code out for various purposes and also it controls the creation of coins with specific quantities of code.
While there is just a truckload of new coins, only a handful of them has the potential to be the investment. A thing about cryptocurrency is that the Government doesn’t have any control over the cryptocurrencies or their creation, which is why they have become so popular.
Most of these currencies have a market capitalization in mind and the production gets decreased in time to make the coins valuable in the upcoming times.
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History of Bitcoin:
Bitcoin has been with people for many years, say exactly around 2009 when a person, Satoshi Nakamoto with a pseudonym has introduced us to this platform which hosts the digital currency.
This platform is highly built on the concept of ‘proof of work’ and therefore it is both expensive as well as time intensive. But once it is produced, it can be easily verified without any issue.
The proof of work in the bitcoin process is created through the ‘mining’ process. To mine one bitcoin, the computer should complete an algorithm that goes through a lot of extensive calculation and everything, in an exchange with the minted currency.
The bitcoin is usually worth whatever, the market decides on demand and supply. The transactions of the bitcoin are usually connected to the user’s address, which is stored on the ledger known as the block chain.
If the address of the user is linked with the real identity, the transactions can be tracked and if it is not, one can’t. This anonymity is which keeps the platform extremely appealing for a lot of new purchases like incognito over the browser.
A component of the block chain is that it is an openly distributed ledger. Because of this distributed nature, the transactions are verified by the consensus of the members offering trust and security without any third party overseers.
One of the important things about blockchain is that it is not definitive. It is a platform which hosts the ledgers on people who has the ability to mine, trade and store the bitcoins and a digital form of currency that can be earned through computer algorithms and absolutely no link to any central authorities.
Other forms of cryptocurrencies:
As Bitcoins are the first form of cryptocurrencies that ever existed, many other digital currencies have been created since and they include Altcoins, Litecoin, Feathercoin, Ethereum, Peercoin and hundreds of others.
Bitcoins can actually be stored on the user’s local hardware and this process is known as the cold storage. Through this process, one can protect the currency from being exploited by other people avoiding the risk of the currency being stolen, if it stored on the internet.
On the contrary, if a person loses any kind of access to the hardware which contains the bitcoins; the currency is gone. It is estimated that around $30 billion of bitcoins have been lost till date or is misplaced by the investors or minors. Nonetheless, Bitcoins are extremely popular as they are known as the famous cryptocurrency of all time.
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What is a Blockchain?
As mentioned, above Block chain is a distributed ledger, the powerful innovation associated with the Bitcoin. Countless industries right from the healthcare to the financial services have been contemplating on how to take leverage of the technology to develop their industries and between everything, comes the blockchain.
The essential power of the blockchain is its ability to distribute the information. As it is distributed over the nodes or computers which usually make the system up, the term, ‘blockchain technology’ came into the picture.
The database of a blockchain is not held in a location neither it can be controlled or infiltrated by a single party. It is hosted by numerous Bitcoin users and around thousands and thousands of computers, operating at once.
Groups of the data held on blockchain are known as the blocks and all these blocks are chained together cryptographically for a linkage.
These pieces are usually buried together so that they become hard to manipulate. Altering any such piece of data would need an enormous amount of the computing power.
One disadvantage of the blockchain is that when it is compared with other databases, the distributed setup will need constant consumption of power from different sources in order to keep up.
While blockchain has been invented around the same time of bitcoin, the idea of creating a distributed ledger is tracked back to a research paper, titled as ‘New Directions in Cryptography’ back in 1976.
For many years, the concept has been insecure and also extremely complicated but when paired with Bitcoin, the distribution benefits and security benefits of the technology has become clear.
The new uses of this technology are being developed by gigantic companies like Deloitte and Microsoft who believe that the verifiable and the decentralized nature of it has a huge potential that goes even beyond the digital currencies with only time having the capacity to tell how far.
Why and how are Bitcoins valuable?
There is more than one reason why Bitcoin is valuable and one of the major reasons is because it has a dedicated following. Bitcoin has been making the headlines regularly for a while now and as a result, many investors got inspired and considered to be a part of this digital currency.
While they are trying hard to add bitcoins to their portfolios, they enjoy the privilege of it not being linked with any government, bank or any other third party entity.
However, it is still hard to understand where the value is actually coming from or what makes the bitcoin actually valuable? Just like every other currency, the bitcoins derive their value because people want them. They follow the basic rules of demand and supply.
Currencies, for centuries, have been the useful tools that make the trades easier while they enable the holders to convert the goods into a tradable commodity and then use the sales to purchase things that they wish.
The flat monetary currencies derive the value from the governments which back them, currencies in the form of gold are valuable within themselves.
As of now, bitcoin is not like any other currency and therefore can’t be accepted universally. There are limits on what the bitcoin can be used for.
While it is not backed by the valuables or the government, they still can be used as a good store of value and as well as an ultimate placeholder for the goods and services, where they can be exchanged with the traditional currencies.
Bitcoins derive the value that despite having an official backing or worldwide acceptance, they have managed to generate an ecosystem where people are willing to accept and trade.
These days, there are people who consider that bitcoin is more valuable than the other currencies and is indeed a better option to use for various purposes including the seamless transfers across the borders.
Also, with the cap set on the number of bitcoins existing; the currency may not actually be devalued through any kinds of inflation. A major benefit of bitcoin, called for censorship resistance allows transactions which are usually censored by other payment methods and networks.
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What are Bitcoin Wallets?
If you finally want to buy the bitcoins, you should be asking yourself, how are you going to store them. You might expect an answer similar to what you do with the flat currency but the details of the Bitcoin wallets will require an explanation more than that.
The keys which are mandatory to access the Bitcoin addresses are actually stored in the ‘bitcoin wallet’. In general, these wallets grant you an access to the public address and through this, you can sign off on all the transactions.
However, these keys differ according to the type of access you are seeking. The factors that are to be considered while choosing the best wallet include security, control, and anonymity as well.
The desktop wallets can allow the users to create the address for sending and receiving the bitcoins, they provide a place to store the private keys as well.
This entire process is done by downloading the bitcoin software on your personal computer. All the mobile wallets are accessed through different apps, allowing the users to transact on the go.
While the ‘full Bitcoin’ clients can download the entire blockchain, the mobile Bitcoin wallets are only designed to utilize a small fraction of the blockchain and then rely on other nodes to access for the remaining information.
The Custodial wallets, where one can store the Bitcoin keys on a third party website on the internet allow the user to access the bitcoins from everywhere. However, there is a danger involved with entrusting someone with that kind of information.
The Bitcoin paper wallets provide services that contain two codes, Bitcoin addresses and the one that links yourselves to the address of another, providing a private key for transferring the bitcoins that are stored on it.
The main reason why people have Bitcoin wallets is that they eliminate the digital storage of the keys, hence, avoiding the potential of the cyber attack.
There is also another type of wallets that store the private keys on the physical devices like the external drives, the USB sticks or the hardware wallets. Therefore, everything narrows down to you choosing the type of bitcoin wallet based on your preferences as it is an important thing associated with the digital currency.
How to safeguard Bitcoins?
If you take a vivid look at the procedure of accruing the bitcoins, you might be wondering how to keep them safe. After investing resources and time in this digital asset, one can’t be sure that they are locked away safely until unless they know how to keep them safe till the time they want to use them.
Honestly, bitcoins are not actually stored anywhere. A digital entity as they are, they can’t be stuffed in cupboards or held in vaults like the flat currencies.
They are accessed with addresses that ask for sets of digital keys in order to enter into the wallet. Therefore, the question that comes into the picture is how exactly can we store these bitcoins just with a couple of keys. Every bitcoin address will contain two different keys, a public key, and a private key.
All the bitcoin addresses are usually derived from these public keys while the addresses are shared.
Thinking of the procedure, it is just the same as you are sharing your email address with a person and using that they can mail you but they can’t actually access your mail and read them without having a password.
Similarly, one can’t get into your bitcoin wallet and take coins just with the public key as it can only be used to send the coins.
Therefore, you need to share this key for transactions. On the other hand, we have the private key which allows us to take the bitcoins from the wallet or to send the bitcoins to others.
This is why the private key is important as it protects the wallet and keeps it safe. Whoever holding the private key can be considered as the owner of the bitcoins stored in that address. However, technically it is possible to get the keys of someone else without actually owning the bitcoins.
There are few methods that people employ in order to protect these private keys for the same to avoid further exploitation. To hold the private key, it is okay to encrypt the wallets with a password. This is the most generic security method that most of the people employ so that their wallet can’t be breached by the viruses or the hackers.
However, others try and opt to keep their access offline where no one can reach them. They hold all the keys in disconnected and secluded databases so that their wallets remain safe from all the potential threats that occur on the internet.
As a different method of protection, many users might as well use multiple signature addresses that allow the parties to hold the fraction of addresses to a particular key.
One can as well hold many keys which are all connected to a single address, at times. When a user wants to access the wallet, the other holders should approve the access as well as the transaction in order to keep things safe.
The customization of the necessary number of signatures can be done by the user when he sets up the multiple verifications through individual devices that are controlled by different users, separately.
Apart from this, there is also a different range of options available to secure the bitcoin wallet and the private keys and each of them has their own set of pros and cons, that are to be weighed.
Concluding, the most important thing about securing a bitcoin wallet is to make sure that your investment is protected in a way that no one else can access it and only you can use it while you need it.
Blockchain Magnets provides general information about financial products and services that should not be construed as financial advice or recommendations of particular financial products or services. It is advisable to obtain appropriate advice from an appropriately authorised financial planner or investment adviser before making any investment decisions or before purchasing financial products or services. Read more here .