A Guide On How To Understand Bitcoin And Cryptocurrency? What is bitcoin and how does it work ?
Even though Bitcoin is one of the most searched for terms (according to Google), it is a very technical subject for a lot of people and can get overly technical for non geeks. However, there are now hundreds of cryptocurrencies and more and more people are starting to want to get to know how they work possibly driven by a dis trust of bankers, which is a whole different discussion.
It is difficult to get a lay man’s explanation without having to use technical terms such as “secret keys”, “digital keys”, “digital wallet” and “cryptocurrency” so I will do my best to keep things as straight forward as I possibly can.
The Concept of Fiat money i.e. paper currency, was formulated to make it simpler for people to make an exchange for goods or services to replace bartering, as this would be limited to an exchange between two willing parties at best, whereas money allows you to provide your service or goods, then purchase whatever service or goods you require from another or others.
Therefore, I would argue that Bitcoin is the 21st Century equivalent to bartering, in that it works as an exchange for goods or services directly between two willing parties. Bartering had to be based on each promise and trust, to provide and deliver the promised goods or service.
Today with Bitcoin or any other cryptocurrency each party would need a unique file or unique key to exchange the agreed value between each other.
By having a unique key or file it becomes easier to keep a record on each transaction. However, this too comes with problems.
Now, bartering is the simple exchange of skills or goods as I have already stated, the modern equivalent, or bitcoin is susceptible to security breaches, i.e. theft or hacking of files, this is where a “cryptocurrency wallet” comes into the equation to secure your transactions.
Basically you need a secure location for your cryptocurrency/bitcoin purchases and holdings. This is where the need for a hardware wallet comes from.
So now that you have written down/recorded which address holds which amount of Bitcoins and then updated every time a transaction is made, the file is known as “The blockchain” – and it keeps a record of all transactions made with bitcoin.
Bitcoin Mining and Security
Now a days the main motive is to make sure that our files are secure and that no one can change said file and claim their address has more Cryptocurrencies (Bitcoin, Ethereum, Litecoin etc.) than in reality they own.
This is where “mining” comes into effect as one solution.
Basically, we have a network that sends the file to tens of thousands of “rubber stampers” that can sign off on the authenticity of the transaction therefore checking that everything is genuine and validating the transfer. Resulting in the sender being able to spend his Bitcoin and ultimately you being able to receive it without concern.
Now, here is where human nature kicks in, we have to compensate people (or miners) for their time and effort for verifying all these transactions (there is also an energy cost to take into account)
After all why not share amongst us all, and this leads us to “Bitcoin miners”.
Did you see my comment above, “After all why not share amongst us all”, welcome to the 21st century and the world of cryptocurrencies!
After all we are cutting out the middle man (bankers and ultimately the government) So the “miners” get compensated with Bitcoins through the blockchain to make sure that all the transactions are genuine, therefore there is no middle man manipulating the currency in between the transaction, how’s that for an amazing deal?
So now you have a decentralized currency (no government manipulation or interference and this is what is important) being watched over by thousands of miners, who admittedly do receive a small fee, but are checking the validity and honesty of all these transactions.
That is money for the 21st century and beyond.
Now, transactions are covered, but where do I store my Bitcoins?
This is where the wallet comes in.
Simply put, you have a unique bitcoin code, this code can be used to send bitcoins to you therefore can be seen by anyone and is visible in order for you to transact across the bitcoin environment.
So where do I keep my bitcoins?
Same place as you keep your money (if you use a wallet) only this is a Bitcoin (cryptocurrency) wallet.
All you do is set up a unique address where you will store your bitcoins (cryptocurrency) and you would go to this address to access how many bitcoins you currently hold. This program is accessed online with an email and password.
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