People have been using feathers, shells, clay tiles, semi-precious and precious metals and paper over the course of history as money. Any form of money is only valuable when more people use it for transactions.
Bitcoin is the latest form of currency used by many today. It is the first decentralized digital currency. Someone under the alias Satoshi Nakamoto invented the virtual currency in 2009. Bitcoin employs a peer-to-peer networking along with digital signatures and crypto graphics to generate currency.
How are bitcoins produced
The Central Bank or Federal Reserve of a country prints conventional currency depending on the need of the country, whereas a process called mining generates Bitcoin. The computer is given a complex mathematical problem to solve and the goal is a 64-digit number, if your computer can solve the complex algorithm, them you can own a block of 50 bitcoins! The network automatically adjusts the difficulty of mining so that 50 bitcoins are generated every 10 minutes. The reason they call it mining is that there is a set number of bitcoins that can ever be mined in the system. Only 21 million bitcoins can ever be mined in total.
How does bitcoin work
This virtual money can be send through the internet, directly from person to person without going through a bank or any other service. Several Bitcoin Exchanges exist online for this purpose, where you can buy and sell bitcoins through Dollars, Euros and other popular currencies. The largest bitcoin exchange today is Mt. GoX.
Individuals called miners secure the bitcoin network. Miners are rewarded with bitcoins for newly verified transactions and these transactions are recorded in a transparent public ledger. The software is completely open sourced and anyone can review the code.
How to store bitcoins
Bitcoins can be stored in cold or hot storages (offline or online)—
Storing bitcoin cold or offline can be done via paper wallet creator softwares, which generates a print out which is then stored in a safe. It is a safer practice for securing your bitcoin wealth, but you need to physically generate a printout every time you transact with bitcoin.
The hot or online storage option is prone to hacking even though it maintains high standards of security. Some of the common online methods employed are via web wallets, mobile wallets, desktop wallet and hardware wallets.
Advantages of bitcoins
Since there is no government, bank or other regulatory involved, it attracts a low fees on transaction. It is a great way for businesses to minimize transaction fees.
It does not cost anything to start accepting them and it is easy to set up. There are no chargeback and you will start getting additional business from the bitcoin economy.
Bitcoin opens up a completely new platform for innovation. The influence of bitcoin is growing, Wiki leaks and Word press accepts bitcoin as cash. It is influencing the way we think about cash today.
Bitcoins can be used in any country, the account cannot be frozen, and there are no limits towards transactions.
Sending bitcoin is as simple as sending an email and you can purchase anything with bitcoin.
Disadvantages of bitcoins
Since the founder of bitcoin is still anonymous and the identity of the buyer and seller not revealed, bitcoin is used for many illegal transactions. Bitcoin fuels the dark web, as there is no accountability.
The value of the currency fluctuates—a lot! At present, only 10 million bitcoins circulate and the value of it keeps fluctuating according to its popularity and demand.
Hackers have destabilized various bitcoin exchanges in the past.
Future of bitcoins
However, having laid out the possible cons of this crypto currency, the future of virtual currency is quite bright and a viable one, as internet is covering different layers of our lives. This model of a self-stabilizing economy could lead to a stable virtual currency for the future.
Bitcoins are going to be the blue print of future currency. Its philosophy has influenced Canadian government to launch Mint Chip—digital form of money.