Bitcoin is a program that form the basis of a digital money. Since Bitcoin is a piece of software, it is completely virtual. It is distributed by using peer-to-peer network, no central host or server, and no central bank that issues, regulates and controls it, that is why it is being described as decentralized. Bitcoin is a cryptocurrency and it is referred to as major cryptocurrency since it was the first and most popular cryptocurrency in circulation.
Bitcoin units are:
- Satoshi, the smallest unit of bitcoin
To avoid confusion about bitcoin, think of a bitcoin as bits of data(numbers) instead of a physical coin or paper money. Bitcoin inventor Satoshi Nakamoto and developers designed it with strong cryptography for security. Even these inventors does not have a control over bitcoin. These bits are generated through mining(read about mining). The value of bitcoin as of this writing is $2400. Big money right? But you don’t have to buy 1 bitcoin to own it. You can buy a fraction of bitcoin by 8 decimals. Example: you only have $50 in your web wallet and you want to buy a bitcoin. It will be like this, $50/$2400, you’ll get 0.02083333.
Why bitcoin was created?
You better read the inventor’s concept of creating bitcoin as cash system here: https://bitcoin.org/bitcoin.pdf . This is the white paper that started it all. Satoshi Nakamoto wanted to create a peer-to-peer cash system independent of any central authority or 3rd party. In the document, he is concerned about the idea of fast and direct transmission of cash, minimal fees, convenient, free from financial institutions, fraud free and secure transaction model since e-commerce is very essential these days. He said: “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” Currently, merchants in an e-commerce model, needs lot of information about their customers. With Bitcoin, you only need an address to transmit money. Merchants and customers both have benefits on using Bitcoin in e-commerce system.
Benefits of using bitcoin?
- It cannot be corrupted or manipulated by someone or by the government.
- Convenient: Easy to make transactions. You only need to know the address of the recipient. (See about bitcoin transactions)
- Cheaper fees: smaller fees compared to other online payment systems.
- Anonymity: all the people can see is your bitcoin address not any of your identity. (See about bitcoin wallet and address here)
How does it work?
Since this is my first post and the introduction to crypto currency, I will explain this in most basic form without technical details by telling a fictional story.
1 bitcoin == $800
Anna has a digital wallet from her mobile phone(read about wallets). She has 0.0125 bitcoin in her wallet. She went outside to have pizza for snack. She saw that Papa Hut pizza is accepting bitcoin as payment. After eating, she went to the counter and open up her wallet app in her mobile phone. Benny the cashier showed Papa Hut’s pizza’s QR code and let Anna scan it. After reading the QR code, Anna put the amount she has to pay(0.005 sathoshi equivalent of $4) and tapped send button. In a matter of minutes, Papa Hut’s pizza already received the payment.
Anna went on a vacation away from U.S. Bags are so cool in France and she wants to buy 1. She asked her dad to transfer bitcoin to her so she can buy the bag she wanted. She sent her wallet address to her dad using iMessage. Daddy, while at work, open his wallet in coinbase.com, pasted Anna’s address and transferred 1.2 bitcoin to her. In a matter of minutes, Anna received the bitcoin.