Bitcoin and Cryptocurrencies are virtual money. You can use to buy and pay for products or services. But unlike most money, bitcoin is not issued by a government. Meaning it has no central governing or regulatory body that controls it. If a government has bills to pay, it cannot directly print more money, causing inflation and lowering the value of its citizen’s holdings. Bitcoin and other cryptocurrencies have a set amount of coins that will ever be in existence. And no one has the power just to make more to benefit themselves.
Why does Bitcoin have any value at all?
There have been different ways to purchase goods and services in society. And throughout time, the standard form of payment has always changed. There was a time when gold and silver were the standards. People carried around coins made of gold and silver and would pay for items based on their medals. Will be later replaced with paper bills that were not worth anything on their own. But were backed by “gold and silver.”.
Meaning anyone could take their paper money and redeem it for these precious metals. However, in u.s. in 1971 under the Nixon administration. It was decided that money would no longer be backed by gold and silver. Meaning the paper had value on its own, not that it had .value paper money only had value because we all accepted it had value.
Today paper money feels pretty normal to us because we all agree it has value. Imagine what people felt when they first started handing over their gold in exchange for paper, probably a little worried and skeptical. That’s likely very similar to how many people feel today regarding Bitcoin.
Perhaps in a few decades, cryptocurrencies will start to feel pretty standard, just like how paper money feels today. Bitcoin and other cryptocurrencies have something behind them called cryptography, which prevents them from being counterfeited duplicated or simultaneously spent. Cryptocurrencies work on what its referred to as a peer-to-peer network. You might remember one of the first peer-to-peer networks.
Napster allowed people to get music from one another by making copies illegally. Although Bitcoin does have several similarities, there is one exceptional difference. Bitcoins cannot be copied bitcoins interact with the block chain. This ledger keeps track of every transaction ever sent, primarily just one giant ledger, every fraction of a Bitcoin.
I was accounted for from the very beginning of the article. Money goes out of one account and into another account, and the block chain makes a record of each account value change. But if no central authority is keeping track of money.
How does it prevent fraud? For example, if I want to send someone $100 through PayPal, I will oversee the whole process, taking money from my account and adding it to another account. And in the process taking close to a three percent fee for themselves. Bitcoin not only works just as quickly but because there’s no central authority.
The transaction fees are only a tiny fraction compared to other centralized money transfer services. It works like this because bitcoin is decentralized. Anyone can join the network and help confirm transactions. If everyone agrees that the transfer of wealth has occurred, it becomes an official record on the block chain.
Think of it like this if 100 independent people are all keeping the accounting books of a company and they all independently agree a buy or a sell is correct, then it’s accurate. However, if one of the 100 tries to cheat, the other 99 will all disagree, and the cheat transaction will be out. Now imagine there are several thousand accountants on the network, all making sure their records match exactly this are essential.
How Bitcoin works every page of Records created by our hard-working accountants is a block. If someone wishes to send Bitcoin to someone else, they inform the network whereby the accountants simultaneously update the ledger by adding the transaction to the current block. And the transaction is approved. Okay, so now we know how deals are approved.
How does Bitcoin stop people from trying to spend another Person’s Money
if you’ve ever spent some time on Earth, you would know there’s no shortage of people attempting to steal other people’s credit cards or full-blown identity for personal gain. What stops someone from pretending they’re someone else. Much like someone could do if they stole a credit card. Fortunately, cryptocurrencies are based on something called cryptography.
Which works by providing specific keys to ensure the transaction is authentic. This data is then sent through a digital lock called a cipher. Which allows it to safely pass through the system while being encrypted on both ends.
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To Hold Bitcoins
You must create an account and be issued a wallet .this wallet is not like the wallet you keep in your back pocket, although the idea is very similar. It’s a digital version of a portfolio that allows the holder of that wallet to send and receive payments through a public and private key. To help you understand what I’m talking about. Think of a parking meter, and anyone can drop money in a parking meter . just like anyone with your public key can drop money into your wallet.
But only the owner of the parking meter has the key that allows them to open it and access all of that money inside, which represents the private key. The private key is what gives all wallet owners the ability to access their money in the wallet. We never want to give out our private key, just like we do not wish to give out a physical key to a lock box holding our money.
Doing so will likely result in us not having any more money. Also, we must never lose that key. No locksmith can make a new key for us. If the private key is, then all the money associated with that private key is also lost.
Sending Money on the Block Chain
When you send money on the block chain, the deal is signed with your private key, which only you have. Once the transaction is posted, everyone else on the network uses the public key to ensure your signature checks out. When it does, the system will then confirm and add the sent funds to the next block. So as you can see. If no one else has the right to your private key, no one else can send your funds.
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Does not mean bitcoins Cannot be Stolen
People are trying to take bitcoins all the time. But when it happens, it’s certainly not the fault of the coin. But instead, the person in charge of protecting their money.
For example, if I went on my lunch break and left my wallet on my desk with a hundred dollar bill sticking out, it might get stolen. When I returned from my lunch break, if my 100 dollar bill was gone, I certainly would not blame the law. The same thing if you’re irresponsible with your cryptocurrencies.
How the sending and receiving Bitcoins?
let’s move back to the many accountants that make sure the block chain is accurate. Here lies another problem, because these people are all over the world, they’re all receiving their transactions at different times. If the purchases were sent in the order of X Y Z., someone else might receive them in the order of Y X Z., and another might receive z Y X.
so now we have a bunch of people who all have recorded transactions. But in the wrong order. Well, Bitcoin has solved this to all these accountants that update the ledger are referred to as miners. They’re all in a race to solve a math problem created by the cryptographic hash function.
Say what imagine if you had to solve X plus y plus Z equals 6. now, of course, there are an infinite number of solutions but, only one is correct. Whatever miner can correctly solve for x y and z, gets rewarded with bitcoins along with the small transaction fees.
This is why there are thousands of people all running super powerful energy-hogging computer systems. Guessing at billions of possible solutions and hoping to get there first and thereby adding the next block to the block chain. So, they may receive their reward. At which time, a new math problem gets added to the system, and the process continues.
It’s also worth noting that for every second hundred ten thousand blocks that get processed, the number of bitcoins rewarded for successfully generating a block goes down by half. It started as 50 coins per block then later decreased to 25 bitcoins per block and then to 12.5 bitcoins per block.
Soon it will be cut in half again. This will continue until the year 2140 when the last Bitcoin will be mined, bringing the total in circulation up to 21 million. After that, miners will continue to mine as there will be so many transactions on the block. That just the small transaction fee everyone pays to send money will add up to an attractive total. I guess we’ll have to wait until 2142 see.