Bitcoin, we hear this term quite often these days in news and many times online. Many times we think that what is it? This article will aim to answer this question. Bitcoin is the new digital crypto-currency that can be used online (or sometimes offline) to purchase things (mostly digital).
Bitcoin was created by Satoshi Nakamoto, and does not relies on any kind of central server. It is based on Peer to Peer networking and does not cost anything for transaction nor is controlled by anyone. All the transactions we make are stored in ‘Bitcoin BlockChain’ (Note: blockchain.info website is a tool to view the blockchain, don’t get confused). Currently, the size of the blockchain is 7-8 GB, that means if you download the desktop client for Bitcoin, you will have to download the whole blockchain to determine your balance. Though, there are available desktop clients for Bitcoin which does not needs to download the blockchain, they relies on their server to host the blockchain and then determines the balance.
There is another option for wallets, Online Wallets, they are not as secure as compared to desktop clients but serves the same purpose. Into a little technicality, each bitcoin address has its private-key, which is basically an encrypted form of your address with a salt. If someone has your private-key, he/she can use your balance too. In case of desktop clients, the private-key is stored on your PC, which in terms of security, can be stolen by viruses or malware. In case of online wallets, your private-key is with the wallet provider, that means you will have to trust the provider that they don’t use your money. Some online wallets stores the private key as text on their servers like CoinBase and other stores an encrypted copy of your whole wallet which is encrypted with a passphrase you choose, so that the provider can not open it, one such wallet is BlockChain My Wallet, it sends the encrypted wallet to your browser and then asks for the passphrase, and is unlocked the client side. It’s much safer.
Now, a little about privacy. The whole blockchain is PUBLIC, that means that anyone with your wallet address can see your balance but can not use it until he/she has your private-key. This is done to make the whole system transparent and at the same time anonymous. A typical bitcoin address looks like 17iyN2eXgrCfqtWF1sGsEZZybivurp1jXq, which is my bitcoin address(this is not my ONLY wallet address, I have many). The bitcoin address are pretty much impossible to remember.
So, how are they created? Firstly, only 21 million bitcoins can be created. About how they are created, they are actually mined. The process to generate bitcoins is called mining and this is just like solving extremely difficult mathematical problems. If you solve it, you get a prize of 50 BTC, that is one block. These problems are so difficult that they will take days, months or years to solve, that’s why instead of mining bitcoins solo, people prefer to go for pooled mining. In pool-mining, the pool operator hosts a computer that has the mining client running, many (your) PC’s connect to it and dedicates its power to the client and you get payed for whatever work your PC has done, it’s called the Pay Per Share method. Now, the bitcoin network is built to automatically adjust the difficulty of the problems so that one block of bitcoins is generated roughly every 10 min. Current difficulty of the network is 7672999.9, which means it is 7672999.9 time difficult to mine bitcoins as compared to difficulty 1. Also, the block reward halves every 840,000 blocks, it was earlier 100 BTC, then it is now 50 BTC and will be 25 BTC after approximately 187 weeks (calculated based on last halving time and block mined). The last bitcoin would be generated somewhere in year 2140.
Bitcoins is costly and pretty much doesn’t have any fees for it, what you pay to someone else, he/she will get the same thing. Though, some online wallet charges fees for each transaction. Current price of Bitcoin is $74.93 (at the time of writing), which has fallen down from the record high of $260.
Did I miss something? Any questions? You can ask any question here in the comments and I will answer you.