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Understanding Bitcoin

Posted November 20, 2015 7:00 AM by cheme_wordsmithy

Bitcoin... it sounds like something out of a video game, a currency created for a virtual world and a virtual economy. But the Bitcoin economy is very real, and and has been since 2009. It says a lot about the very technological and digital age we live in. To truly wrap my brain around the bitcoin, I decided to ask a few fundamental questions about its existence:

What exactly is it?

Bitcoin is a virtual currency, meaning it takes no physical form. It isn't printed like the dollar or euro, and isn't molded like a penny or quarter. It exists solely in the form of electrons, or data on an electronic device. Like dollars in your online bank, you can purchase things online with bitcoin or use an electronic device to spend bitcoin at a physical store. But you can't physically withdraw it like you would a dollar from an ATM.

Similar to the dollar though, the bitcoin is not based on a physical standard such as gold, silver, or other precious metals. It has value simply because the people who use it believe it does. And as I write this article, one bitcoin is currently valued at $326.85

So how are bitcoins created?

Bitcoins are created by a system called "mining", which awards the money in a lottery-type system to computers which run specific software to solve math problems. These math problems are used to maintain the network's ledger and confirm transactions, which is essential to how bitcoin works (more on that shortly). The original coder of the bitcoin program was an unidentified person who went by the alias Satoshi Nakamoto. Nakamoto wrote the code to limit the maximum number of bitcoins generated to 21 million. There are currently over 14.8 million in circulation.

Where can one acquire and store bitcoin?

The easiest way to acquire bitcoin is by buying it on a marketplace called an exchange. The exchange rate for bitcoin fluctuates with its changing value. Once bought, bitcoins are stored in a digital wallet, either via cloud storage or on a person's computer.

Where can I spend bitcoin?

Bitcoin can be spent anywhere it is accepted. The number of online and real-world stores accepting bitcoin has grown significantly over the years, particularly in California and in areas of Europe.

What prevents someone from counterfeiting bitcoin or cheating the system?

As mentioned above, what is unique about bitcoin is its "general ledger" system. Instead of having one governing entity to track and control where money is made and prevent counterfeiting, the responsibility rests on the bitcoin community. Everyone who participates in "mining" bitcoins helps to build the ever-increasing trail of bitcoin transactions. Miners essentially use their computers to create unique IDs (called "hashes") for every "block", or group of transactions, in the bitcoin network. Once a block is created, it is stored in the system, and any attempt to change its code would be instantly flagged as false by every computer plugged into the network. The same goes for subsequent blocks, which build on the unique code of previous ones, preventing counterfeits.

What are the advantages of bitcoin?

Bitcoin was built on the premise of being a straight peer to peer currency that was unregulated and uninfluenced by governments and institutions. That face of bitcoin is changing since governments around the world are beginning to officially recognize the currency. And the anonymity that bitcoin touts (not needing your real name to buy and trade bitcoin) is also an illusion, since network IDs are recorded (and can be tracked) for every transaction made.

Still, bitcoin maintains the advantage of providing fast transactions with few to no fees. And bitcoin's public ledger system has proven to be very secure and largely unhackable, which is why the technology has caught the attention of many big banks.

Will it last?

That's a big question isn't it? I certainly believe that the networking concepts and security features behind bitcoin will last. And bitcoin's robust system, passionate community, and recognition around the globe will certainly contribute to its staying power. Bitcoin is still not as widely adopted in the marketplace, and that has contributed to a lot of volatility in its value, and consequently a lot of fear and hesitancy surrounding its use. But even if bitcoin crashes sometime in the future, I think cryptocurrency in some form or another is probably here to stay.

References:

Coindesk.com - What Is Bitcoin

Bitcoin.com

IEET

Softpedia

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#1

Re: Understanding Bitcoin

11/20/2015 11:36 AM

Don't invest more than you are willing to lose. It may be 'real', but who guarantees it?

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#2
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Re: Understanding Bitcoin

11/20/2015 11:52 AM

Bitcoin or standard currency?

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#10
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Re: Understanding Bitcoin

11/21/2015 11:03 PM

Yes

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#14
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Re: Understanding Bitcoin

11/23/2015 9:57 AM

Perfect "mathematician answer" Phoenix, bit to expand it for those who won't get it right away:

"Don't invest more than you are willing to lose. It may be 'real', but who guarantees it?"

"Bitcoin or standard currency?"

ANY currency, stock, bond, or other investment. It's the rule 101 of investing, currency speculation, and poker: "Don't bring to the table any money you can't afford to walk away from."

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#17
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Re: Understanding Bitcoin

11/23/2015 10:24 AM

goes with my post #16

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#3

Re: Understanding Bitcoin

11/20/2015 12:41 PM
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#4

Re: Understanding Bitcoin

11/20/2015 6:04 PM

Bitcoin = digital Ponzi or digital dot.com, either way, I don't use.

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#5
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Re: Understanding Bitcoin

11/21/2015 7:00 AM

The very concept of bit coin is ILLEGAL. Imagine everybody started printing notes- even Dollars valued at $10 or even $100 or even Euro 10 or Euro 100. So where do you stop. Why should that person be from Australia or US or Canada only? Why not someone from a country promoting terrorism or drugs? Whoever though he was trying to promote bit coin- as a currency, was trying run a parallel economy !!!

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#6
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Re: Understanding Bitcoin

11/21/2015 8:14 AM

I was surprised it was legal... apparently it is in most countries.

https://en.wikipedia.org/wiki/Legality_of_bitcoin_by_country

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#7

Re: Understanding Bitcoin

11/21/2015 9:12 AM

Buy bit coin? You need to put up dollars or euros to buy virtual money? What is the point? Mining? My son got into this spent thousands of dollars for a computer special made for mining bit coins. the computers run 24/7/365 and use a lot of power. in fact He had to put in an air conditioner in the room where the computer is running just to keep it bearable. At the time of this writing He still hasn't even a fraction of a bit coin. He has spent more money on electricity and hardware then its worth. Oh also the computer that You have at home has very little chance of solving the algorithms needed to mine bit coins.

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#8

Re: Understanding Bitcoin

11/21/2015 10:28 AM

All modern currency (AFIK) has no intrinsic value.
It only works because it is accepted by people. It is just a convenience so that the bankers can rip off everyone without actually carrying sacks of gold or grain back and forth (or doing any actual useful work).Bitcoin is no different... it's just a different set of criminals using it!Del

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Re: Understanding Bitcoin

11/21/2015 11:49 AM
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#13
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Re: Understanding Bitcoin

11/23/2015 8:46 AM

Fortunately most of us are too far invested into the common delusion of the value of currency. Otherwise, civilization would fall like a house of cards. But it is a useful delusion because I can offer my goods and services without having to search for someone that needs what I have and has what I need.

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#16
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Re: Understanding Bitcoin

11/23/2015 10:22 AM

The value of currency,... or more detailed the actual stability of the Financial Institutions are actually quite unsound.

This instability is what insiders use to make their money.

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#11

Re: Understanding Bitcoin

11/22/2015 3:38 PM

Similar to the dollar though, the bitcoin is not based on a physical standard such as gold, silver, or other precious metals. It has value simply because the people who use it believe it does.

Ahh, the good old days when governments had to back up their printed currency with real resources (gold for example).

Like our current printed currencies, the Bitcoin is another "virtual" currency, exploitable yes (but what currencies aren't), but at least it is an alternative to government (USD) and large corporate controlled (credit card) currency (if you so choose to use it) and that really is one of its biggest draws in my opinion.

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#12
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Re: Understanding Bitcoin

11/22/2015 4:15 PM

In my opinion that's where its largest draw is in the fact it's a decentralized digital currency that by design is very difficult to counterfeit or launder plus being set up with a finite number of coin units it very hard to deflate its face value by printing more.

Personally I am curious to see what it looks like in world currency and useage 10 and 20 years from now.

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#15
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Re: Understanding Bitcoin

11/23/2015 10:03 AM

Actually, since bitcoin transactions have a level of annonymity to them, (once a block of transaction history gets 'hashed' the details of that part of that coin's 'journey' are lost) they are very good for money laundering and buying selling illegal goods.

The Dark Web site, Silk Road, dealt almost exclusively in bitcoins for its transactions, before it was shut down.

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#18

Re: Understanding Bitcoin

11/24/2015 11:59 AM

and isn't molded like a penny or quarter.

They aren't molded - they're stamped.

Some of these articles...

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#19

Re: Understanding Bitcoin

11/24/2015 3:21 PM

I prefer the real thing...

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