Bitcoin-How It Works.

Article by · June 1, 2018 ·

Bitcoin basically redefines what we have come to understand as a financial system.

We all feel safe investing in banks because there is a central authority that keeps track of all transactions that take place and it is regulated. Bitcoin is different. It is not that it isn’t regulated it’s simply that it is ‘differentially’ regulated by peers. In this article we will discuss the concept of cryptocurrency as well as the unique peer regulation model offered by Bitcoin.

The concept of Bitcoin, of a virtual, intangible currency should not scare people as much as it does. Our banks spend our money and savings by investing it to make a profit. They are only required to maintain a reserve ratio of the amount we deposit. That is why some savings accounts require us to give the bank advanced notice when we would like to withdraw larger amounts. If all of us ran to the bank and asked them to pay out what is in our savings account ‘on paper’ they would go bust. So in a sense we should be comfortable with the idea of a virtual currency as proposed by Bitcoin.  

Encrypted Currency

Bitcoin relies on the world wide peer-to-peer networks to transfer digital currency between computers. The same network we use to illegally share movies with one another. God bless Pirate Bay. Except with Bitcoin its a force for good. Bitcoin cannot be duplicated in the way other forms of media like MP3’s or video files can. So this stops people from multiplying the Bitcoin they get and sending it to themselves to inflate their holdings. The ‘regulation’ is built into the ‘structure’ (for lack of a better word) of the product. The currency is essentially encrypted to prevent this from happening.

Blockchain

The transactions that occur on Bitcoin are recorded on what is referred to as a blockchain. This is a kind of mega-ledger that keeps track of all transactions. There is not a formal group of people who update the ledger it is kind of like a community led initiative. Any one can volunteer to keep the blockchain updated with the latest transactions. Bitcoin provides incentives for people to keep the blockchain up to date. This means that there are many people keeping track of the same transaction ensuring that it is correctly recorded.

The analogy that is used of that of poker game where people don’t really trust one another. In this scenario they keep track of one anothers bets so that nobody tries to abuse the system and get more out of it than they are supposed to. This helps decrease the chance of irregularities occurring.

These volunteers are able to keep track of the transactions on Bitcoin as whenever one occurs it has to be announced to the entire network. You announce your account number and the account number of the person you are sending Bitcoins to every time you make a transaction.  

With network delays and multiple people keeping track of the same transactions how does Bitcoin prevent the same transaction from being logged multiple times on the blockchain?

The answer is by solving mathematical equations. To add transactions to the chain a person who maintains the ledger has to solve a math problem created by what is called a cryptographic hash function. A computer will run through a list of possible solutions to the maths problem presented by this hash function. Basically a special computer with specific processing power will guess answers till it gets it right. Whoever gets it right first gets to add the next block of transactions to the blockchain and is rewarded well for doing so. This hash function was initially created by the United States National Security Agency. So you can rest assured that it is pretty secure.  

The cost of these computers and the cost of running them is high but the incentives that bitcoin offers are enough to make it worth the volunteers while. These volunteers are also referred to as miners.

How is your account kept secure?

Your account is kept secure through cryptocurrency. Bitcoin makes use of what is called keys which are used to guarantee that a transaction has come from you. Your account or wallet is linked to two keys. A public key and a private key. The private key will sign a transaction with a kind of signature on the data which only you have access to. The public and private key are linked which means that your public key will not verify the transaction if your private key signature is not present. Everyone can use the public key to verify that the private key signature is legit. The private key is not like a bank pin or signature which is vulnerable to fraud or hackers. The accounts themselves are very secure.

The top five trading forums for Bitcoin include:

1). CEX.IO

CEX.IO facilitates essential Bitcoin trading where you can buy and sell Bitcoins. Bitcoins payment methods support credit cards, debit cards, bank transfers and cryptocurrency.

When you trade in bulk CEX.IO has a particular high-volume trade fee structure, so you pay less than the conventional prices.

2). LocalBitcoins

LocalBitcoins is a forum where you meet the person who is selling or buying Bitcoins. It is not autonomous such as on other trading platforms. When you deal with a human, the exchange rates and payment methods will differ based on the country or currency. On this forum, you can check the individual’s public history track record. A person who has a high score indicates that they are trustworthy.

3). Coinbase

Coinbase is one of the best cryptocurrency trading markets in the industry, and it is also one of the most secure. You can automate purchases and sales without having to go on your computer.  At first, your buying limit will be restricted, but as you purchase more, it will increase. Providing forms of identification will also raise your ceiling.

4). LakeBTC

LakeBTC is well known for its secure environment and well-priced transaction fees. It has an extensive currency support structure with everything from the US to Hong Kong dollars.

5). Bit Stamp

This platform is the first ”Nationally Licensed Operator”.  They accept multiple currencies. This platform offers lower Bitcoin prices and bulk buying opportunities.

Whatever your feelings on Bitcoin you have to appreciate its ingenuity and success as a cryptocurrency. Whether this will be a long term and sustainable alternative to the financial system we have come to understand is yet to be determined. We hope this article has helped you make sense of how Bitcoin works and is able to keep your account secure through encrypted use of security keys. Like and share this article if you enjoyed it and found it useful.

 

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