Little Bit about Bitcoin
I got interested in cryptocurrencies especially bitcoin about an year before. And wrote this article at that time to publish somewhere. After one year of procrastination :), I am finally posting this here. You will find tons of in-depth articles about bitcoin in Internet. So most probably, you won’t gain much extra knowledge from this. But I decided to publish this now, as I wrote this as a noobie in bitcoin. Maybe this will help people who are completely new to it. I have edited little to make this article useful at present.
The first part consists some basic information about Bitcoin and 2nd part, intermediate level. Feel free to move on to the second part if you feel so. I really hope that this will help you to gain some knowledge about Bitcoin and cryptocurrencies in general. By the way, you are already in first part.
India implemented demonetization policy in 2016 November. Old currencies of 500 and 1000 rupees were demonetized, and brand new 500 and 2000 rupees currency were introduced. Due to the huge population and ineffective logistics, at one point, the government was forced to set maximum withdrawal limit to 5000 INR in all the banks. That day reminded me of the fact that banks are nothing more than somebody whom we entrust our money with, for safekeeping. Their history proved that they are good at safekeeping. Plus, we will get a little extra cash.
In a way, such problems happen, not of centralised monetary institutions like Banks. The problem lies in the physical nature of currencies. In the digital era, where everything is in tip of your fingers, implementing monetary policies in a physical currency based system create huge delay!
Bitcoin is a digital currency. You may hear terms like cryptography, blockchain, distributed ledgers and all. But all of them are tools of its implementation. Just features of Bitcoin which makes it superior to many other currencies.
What is digital currency? Before that, what is currency? Presently, countries issue only fiat currencies. Like INR or USD. It means, that currency is having its value because its government is supporting it. The government have advised and enforced the people to exchange this currency against the goods and services they can offer.
What if, without anybody advising or enforcing people, they are ready to accept a currency? Rahul is accepting it because everybody in Rahul’s locality accept it. Everybody in Rahul’s locality accept it because everybody thinks like Rahul. All fiat currencies are currently tangible. But in digital currency, the transfer means nothing but changing the balances in mutually acceptable electronic currency wallet of both payer and receiver.
So Bitcoin basically is just a number against an address(like account number) in a big online ledger. Ledger is just a table containing financial account/transaction details. When I transfer one Bitcoin to my friend, I will have -1 in my account and my friend will have +1 in his. You as an individual can use a Bitcoin wallet like any other online wallet, like paytm or e-wallets of banks. Every Bitcoin account will have two credentials, a public key and a private key. Like user name and password of our facebook account. The user name is public, everybody can see that, but to make a change to the account we need password. In case of Bitcoin, private key is necessary for transfer.
This is what a set of public and private keys will look like.
Public key: 1H9N3AF2bMis4BoXWcoitrc959Rna23jH7
Private key: KwLhSYcLHBvpsUTtuEPbFQz4YrM6C55xLJWTLe1bmZ8hJbmhirbt
Don’t worry, You don’t have to remember the private key if you don’t want to. But if I was a Bitcoin user, I will save my private key in a Bitcoin wallet which is password protected and use that wallet for smaller fund transactions. For holding more Bitcoins, I would keep my private key secure, probably will write down in a real paper and will take extra precautions when I use that private key in any wallet.
No single authority can control Bitcoin. Remember I mentioned an online ledger, that ledger is having its copies in many computers around the world. Bitcoin is practically invulnerable. Which means nobody can manipulate the Bitcoin ledgers. Which is obviously without considering quantum computing.
There are 3 methods to acquire Bitcoin. You can buy them in any Bitcoin exchange. Uncoin, Zebpay etc are some of the Indian Bitcoin exchanges. You can ask somebody to send you Bitcoin or you can mine it.
If you are going for the first option, that is buying Bitcoin from any exchange, there are some important points to keep in mind. When you buy Bitcoins from an exchange, it will get transferred to a wallet and the private key will be accessible for you. But those private key will also be in their server. Bitcoin is practically invulnerable so far, but the servers aren’t. Any malicious hacker who get into that server can transfer all the Bitcoins into wallets of his interest. My advice is you generate a key pair by yourself and transfer all Bitcoins to that address. You can use the exchange wallet itself for that. There are many softwares which generates key pairs. Though I advice for an completely offline software for this, those who want to avoid the installing time etc, bitaddress is a good option.
There is no centralized 3rd party like visa or paytm to authenticate a Bitcoin transfer. The Bitcoin network authenticate it. Bitcoin network is nothing but a network of computers also called as miners, which are dedicated to check the authenticity of every Bitcoin transfer. Remember I told there is an online table with the account balance against each address. Infact there is no table like that. When I transfer 1 Bitcoin to my friend, the network will see how I got that 1 Bitcoin, it will check the authenticity of all the transfers which brought me that 1 Bitcoin. Imagine half of that was sent to me by my friend Rohit. Then the network will see how Rohit got that half Bitcoin. That trace will go on until the stage where that Bitcoin was generated. But in an abstracted form, it act like variations in an online table.
An obvious question which may come to your mind right now is how Bitcoin ensures the safety of your transfers. By using cryptography and a term called global consensus.
When you own some Bitcoin there are two people who may try to manipulate the system. You and everybody else. Your private key will prevent anybody else from accessing your Bitcoin. No two accounts will have same private key in practical scenario. When ever you make a transfer order, your wallet will encrypt some information and send it to Bitcoin network for authentication. That some information includes public key and a digital signature. Digital signature is a term to secure your private key from everybody else, even from the Bitcoin network of miners. The Bitcoin network can verify whether the signature came from the real private key without really having the private key.
So what makes a transfer valid. What makes anything valid (not talking about truth) in pure democracy . When majority says so. So all the miners in the network agrees that the transfer was legit, then it is legit. So what if a rich guy decided to buy lots of mining computers and authenticate transfers in favor of his interest. Or what if a group of miners decided they will do the same. The total mining power of Bitcoin network is more than 10000 times faster than of top 500 supercomputers combined. As you can see, no single person can compete against that computational power. The term when majority of miners say its true is global consensus.
The term blockchain means a chain of some abstracted sets of data irreversibly added to the network. That set is the block and each set will be added one after another periodically. So why do Bitcoin network need so much computational power, after all they are just managing some data?
This is because of the theory behind Bitcoin blockchain called ‘proof of work’. In simple way, the network have to solve a mathematical puzzle to add a block into the chain. That mathematical puzzle involves trial and error. So every miner in the network will try with a randomly generated solution until one of them find the right answer. That miner will share the answer to everybody else in the network. All other miners will check the validity of solution, if more than half of the network agreed, then the block is added to the chain. The miner who found the right answer will get a reward as mined Bitcoin and miners fee. Miners fee comes from the person who transfered the Bitcoin. This will increase the speed of transfer. The network will generate a particular amount of Bitcoin in the miners account when miner is right, currently its 12.5 per block.
Bitcoin mining is really similar to gold mining in real world. The more we mine, the lesser minable Bitcoin remains. Like gold, the total amount of Bitcoin is limited. 21 million . The amount of Bitcoin mined while validating per block will keep on decreasing so that all Bitcoins will be mined only by 22nd century.
As authenticating a Bitcoin transfer is computationally intensive process, on an average, a transfer will take 10 minutes for confirmation. The network will adjust the difficulty of mathematical puzzle according to the total network computational power so that average time remains almost same, under the current set of rules.
(Later addition) Bitcoin is open source. Which means it is developed by developers across the planet. Once in a while Bitcoin network will undergo upgradation. Like you can expect, for accepting the new update by the network, there is will be voting process. There was a major upgradation in network which gave birth to a new coin called Bitcoin cash. This was from the motto of cheap and faster transfer over higher-sensor resistance. It started with a transfer speed 8 times faster than Bitcoin. We can expect that Bitcoin cash will improve further sticking to their primary goal.
In my opinion, with the current protocols, Bitcoin will never replace any fiat currency. In fact it is not build to replace fiat currency. There are numerous potential candidates for that in cryptocurrency world. Imagine you are using Bitcoin to buy a train ticket and you have to wait minimum 10 minutes to get the confirmation of the payment. But Bitcoin CAN replace gold and many other traditional value holding instruments. Again I am not talking about cryptocurrency in general.
But as the technology gets more mature, complimentary products and services will get developed on top of the Bitcoin or blockchain and the above given situation will change.
Nobody can assure you that Bitcoin will prevail and will become the next gold in finance sector. But currencies based on global consensus and blockchain will be there.
Is bitcoin a bubble? I believe that bitcoin is like a pioneer startups of dot com era. Only future can prove its real worth. No doubt, it will motivate and pave path for giants. And I don’t believe that bitcoin will eventually lose its value. That is human nature, even tulip bulbs will find buyers. Due to the huge investments in ASIC mining pools across the world and crypto millionaires who are currently quiet powerful and influential(due to speculative nature of market) , a better possibility is for high magnitude oscillation in bitcoin valuations.