HOW DOES BITCOIN WORK?

In a nutshell, cryptocurrencies work very similar to how email works. Imagine your email client (outlook, Gmail and thunderbird) had the ability to attach money and you can send or receive money to other people by giving them your address or send to their address.

The actual “how” of How bitcoin works is probably too technical for most of us, but to simplify this explanation bitcoin is a massive network of computers all carrying an exact copy of the same database - this database records transactions that are created. Some of these computers are “mining” for more bitcoin - when a computer “mines” for bitcoin, it’s actually in the process of solving a mathematical algorithm. When it solves a part of the puzzle it is rewarded with a portion of bitcoin. The bitcoin is then stored in a wallet and can then be spent, traded, sold etc but most people who use bitcoin would not use their computers to mine because only specialist machines are used for bitcoin today. In the past, anyone could do it from their PC’s but it has advanced to the point where “supercomputers” are used.

You do not need to know how to mine in order to use bitcoin. Most bitcoin users do not mine and no one is required to learn about it. To further explain how bitcoin works, assume person A sends another person B a bitcoin or a part of a bitcoin (a bitcoin is broken down into 1 million bits and any amount of bits can be used in a transaction)

Person B gives person A their bitcoin address, this address is then entered in the recipient’s section of person A’s wallet. The amount of bitcoin to be sent is then entered and once the transaction is initiated the transaction is then written to every copy of the database across the internet - when the transaction has been verified by at least a handful of the computers on the network then the entire network recognizes that transaction and it cannot be disputed - at this point the receiving bitcoin address will be allocated the bitcoin that was sent and the receiver can do with it what they want to. 

As stated earlier, cryptocurrencies are somewhat similar to email in that you have a sender address and a receiving address and a storage place. Except that email goes through a centralized server that handles all the emails, bitcoin goes direct from person to person and each side has secret cryptographic keys which prevent tampering, forgery or theft. Bitcoin wallets allow you to generate as many different bitcoin addresses as you want and some people suggest never to use the same address twice for advanced security. 

That is really the basic way that cryptocurrencies work to send and receive money.

BENEFITS OF CRYPTOCURRENCIES

Cryptocurrency offers a variety of benefits over normal money. 

These include;

Anonymity - Transactions with cryptocurrencies can be done without divulging much if any personal information about yourself. This ties in very closely with identity theft, the conventional way of transacting opens us up to identify fraud where one’s credit card and all associating information can be skimmed and copied. Credit card purchases “pull” a payment from a person and this can be initiated without your authority whereas cryptocurrency payments are “pushed” by the payer. Cryptocurrency payments cannot be “pulled” by a merchant. However recurring payments can be set up using cryptocurrency, but this is still a push, not a pull.

Cheaper Fees - cryptocurrency transactions cost a fraction of regular banking transactions.

Ownership - cryptocurrencies cannot be taken away from you by anyone unless you give it up.

Cyprus 2013 is a prime example of this where the central bank wanted to take back any uninsured deposits over $100,000 to recapitalize itself. As you can imagine this cause a huge outcry. Cryptocurrencies prevent this from happening as no one can take control of your money without your permission or without holding a gun to your head.

Global Recognition - The cost of doing business across countries includes the process of converting from 1 currency into another - often at a cost that eats into profit. Cryptocurrencies can be sent from 1 country to another with very low cost and no exchange rates applied.

Speed - The average cryptocurrency transaction can take anywhere between 2 and 20 minutes to complete from sending to spending the received amount. Conventional banking can often take days to complete. An international wire can take up to 7 working days to be complete.

Accessibility - There are many countries with rural areas where the residents have little or no access to conventional banking. In the world of cryptocurrencies, anyone with a wallet on their mobile device, laptop or desktop can have access to money without the need of a conventional bank. Even if you do not own a mobile device or computer - your cryptocurrency “bank” can be accessed from any internet cafe or library with a computer (Although this is not recommended as key loggers may be installed on public computers and your passwords can be accessed) 

Fraud Prevention - Many online merchants and sellers have been subjected to buyer fraud where the buyer charges back to their credit card once they have received an item they purchased online. Cryptocurrencies prevent this because you cannot charge back. 

Anti-Counterfeiting - A cryptocurrency cannot be counterfeited because every coin in the system is accounted for. This alone plays a major role in economics because often the cost of counterfeiting is passed back to tax payers to recoup any losses due to counterfeiting. 

While counterfeiting has become harder over the years because of the materials used, it is still not possible to completely and utterly prevent people from counterfeiting money.

What if the process of buying or selling anything with paper money had to include a step that scrutinized the money, checked the material used, double and triple checked the registration number of the note and checked that number against a massive database to see if a duplicate of that note exists anywhere? And if there is a duplicate or the note is proven to be a forgery, the transaction is halted and cannot proceed? What if the note contained a very secret identity number with a built in secret password that must correlate when checked against the database of money and if the database’s entry does not match the note you are holding, the transaction is rejected?

Wouldn’t that be a sure way of beating counterfeiting? Probably - but that’s not how things work, when you go into a store and buy a bag of groceries and hand over $100, the cashier has no way of checking the validity of that note other than looking at it, using a light or feeling it. And the reverse is also true, when they hand you your change - how do you check to see if the change you received is real? It may look real and feel real but could be a very good forgery, you just don’t know.

Traditional money handling processes have absolutely no way of ensuring that you are not handling a counterfeit. 

Cryptocurrencies, however, do provide a way to ensure that no one can cheat, fake or try and create a fake coin because the entire network must accept the validity of the coins being used in the transaction - the entire network must agree that everything is good and well and the transaction is allowed to go forth. Every single cryptocurrency mining computer or node carries a copy of the cryptocurrency database, and every one of them checks and validates every single transaction and confirms it. Every transaction is protected through the use of cryptography - where a secret key is used to validate the coin and transaction hence why it is referred to as a cryptocurrency.

BITCOIN MYTHS

1.     Bitcoin Is Not A Real Currency

FASLE

While technology and change can be scary, it does not mean that it is not real or

not valuable. If someone told you 50 years ago that by 2017 everyone would have their own mobile phone, you would think they were crazy. But today it is a reality.

And that is what is happening now with Bitcoin and cryptocurrencies. Many people don’t understand them, which is not only why many do not yet trust them, but also the main reason we created ICoinPro. The bottom line is, while there are a lot of questionable cryptocurrencies popping up that give legitimate ones like Bitcoin and others a bad name, Bitcoin is certainly a real currency and its value is growing daily. 

2.     21 Million Bitcoins Are Not Enough 

FALSE

Just like a dollar can be broken down into 100 pieces, a single bitcoin can be broken down into 100 million pieces known as “satoshi”. Each piece of bitcoin has value. In reality there will be 2,100,000,000,000,000 (2.1 quadrilion) units of bitcoin. To put that in perspective, there are only about 12,000,000,000,000 (12 trillion) US dollars in circulation. That’s more than enough. 

3.     Bitcoins Can Be Copied 

FALSE

No two exact same bitcoins can ever exist at the same time in the bitcoin ecosystem. If someone were to try and fake a bitcoin and add it on the network, it would be immediately rejected as bitcoin was designed to prevent this from happening. Unlike fiat currencies, cryptocurrencies can never ever be counterfeited.

The only time that this is possible is if there is a deliberate fork (a severe change to the system) which can only be done with the consent of every miner on the network, a fork would require that every mining computer start using a new version of the software that drives bitcoin.

4.      Bitcoins can’t be used like money

FALSE

Firstly bitcoin is not “like money”, bitcoin IS money, just a different form of money. Secondly, bitcoin is accepted by over 200,000 vendors that include well-known companies such as Microsoft, Steam, Virgin, Subway, Dell, Newegg, Overstock and even sport teams like the NBA’s Sacramento Kings accepts bitcoin as a form of payment for merchandise and tickets. Even beer and hotdogs sold at their home arena can be bought using bitcoin!

A BRIEF HISTORY OF BITCOIN

In 2008, a man calling himself Satoshi Nakamoto released a whitepaper called “Bitcoin: A peer to peer electronic cash system” (https://bitcoin.org/bitcoin.pdf) describing a new digital currency that was immune to forgery and immune to falling prey to the problems facing fiat currencies. In January 2009 Bitcoin came online. Nakamoto mined the first block (the Genesis block) for a reward of 50 bitcoins. Websites dedicated to Bitcoin started popping up and transactions started happening; the most notable was a transaction for 2 pizzas for the price of 10,000 bitcoins.

At the time, the price of bitcoin was less than a penny per coin.
Over the next 2 years, websites slowly started accepting bitcoins for payments and donations and growth exploded with more and more websites and people starting to use and mine bitcoin.

In early 2011, Bitcoin was the same price as the dollar, a dedicated magazine for cryptocurrencies was launched educating more and more people about Bitcoin. Bitcoin started being mentioned on TV, in financial news and documentaries and even in fictional TV shows.

Bitcoin started getting the attention of financial crime organizations and watch groups seeking to prevent the use of bitcoin for money laundering, tax evasion, and other financial crimes.

In April of 2011, inventor Satoshi Nakamoto separated himself from Bitcoin, its open source nature ensuring that other developers would continue to contribute to its code. After he had given this gift to the world, his parting words were that he had moved onto other things.

It has become the topic of many debates, but the general speculation is that Satoshi Nakamoto is not 1 person, but instead, a group of seriously intelligent mathematicians, coders and financial gurus whose Bitcoin addresses suggest that they are holding more than $1 Billion worth of unspent bitcoins. No one has heard from him (or them) since.

In the same year, the infamous darknet market, Silk Road, was launched. Using Bitcoin as a payment method, the site allowed the sale and purchase of various legal and illegal substances, guaranteeing the privacy of both sellers and buyers. It has since been shut down with the owner being sentenced to prison for various crimes.

The FBI and other justice departments broke several laws, including hacking the Silk Road servers, to obtain sufficient evidence to prosecute, violating various privacy laws in the process.

Despite the negative press surrounding the Silk Road, it showed the world that there was a definite need for a private peer to peer money system - people started realizing that they should be allowed to use their money in any way, shape or form, for whatever purpose without the prying eyes of big brother watching - a revolution was started and gained momentum because the masses were seeing that Bitcoin was exactly that - a way for people to use money without having to explain themselves to anyone and was exactly what the world needed.

Bitcoin payment processors such as BitPay and Coinbase started popping up, allowing more websites to accept Bitcoin as a form of payment.

2013 was a tumultuous year for Bitcoin, it had started the year at around $14 per bitcoin and before the end of the year would reach over $1000 per bitcoin. The financial world was ablaze with news of this new gold. People started sitting up and taking notice.

In the same year, 2 companies launched the world’s first Bitcoin ATM’s allowing people to withdraw or deposit fiat against bitcoin. Restaurants, casinos, universities and other websites started accepting Bitcoin as a payment method. The world was starting to take notice. Sadly around the beginning of December, Bitcoin started falling. For the next year, the price of bitcoin tumbled slowly all the way down to $200 a bitcoin.

Even though Bitcoin tumbled, many people realized that the fall was due to the inorganic growth of bitcoin to reach $1000 and took comfort in the speculation that if it had been there before, it would get there again, reinforced by the actions of many companies whose interest in Bitcoin never waned, such as Microsoft who started accepting payments for apps and Xbox games.

In 2015 Bitcoin was trading at around $200 at the beginning of the year before starting its march upwards. By the end of the year, the price of Bitcoin had doubled – and more than 160,000 merchants were now using Bitcoin.

2016 was a year of nonstop rallies for Bitcoin which rose all the way up to over $1000 and breaking its previous high price. Japan officially recognized bitcoin as a currency. Big companies such as Steam and Uber accept Bitcoin as a payment method.

By the end of 2016, there were nearly 800 Bitcoin ATM’s worldwide.

In March of 2017, 1 bitcoin was worth more than 1 ounce of gold.

An ETF for Bitcoin was submitted by the Winklevoss twins, gathering more interest in Bitcoin. The ETF was declined, resulting in a sharp decline in price but quickly reverted and Bitcoin rose quickly.

In July of 2017 Bitcoin broke past the $2800 barrier. And this is just the beginning.

WHAT ARE CRYPTOCURRENCIES?

A cryptocurrency can be defined as a digital currency that uses advanced encryption to protect the money as an asset. They are a medium of exchange that uses cryptography to prevent falsifying of records making cryptocurrencies immune to forgery.

Cryptocurrencies are decentralized and work peer to peer, independent of a centralized authority such as a bank.

Bitcoin is known as the first widely adopted Cryptocurrency that started a worldwide awakening allowing the average man in the street to realize that he can manage his wealth assets without the need for a bank. While many people believe that Bitcoin was the first digital currency, this is actually an incorrect assumption because other cryptocurrencies and digital cash technologies existed before Bitcoin such as ecash, bitgold and bmoney.

Cryptocurrencies can be passed from person to person for an extremely low fee, allowing people who use them to pay for money transfers much cheaper than using services such as PayPal, Payzaa and Payoneer.

In short a cryptocurrency is a digital currency that uses advanced cryptography to control the security of the currency and is not controlled by any central bank or authority.