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What is Bitcoin: A brief discussion

Welcome back guys, today i will continue writing about Bitcoin. As many of you already know, Bitcoin became almost a household term in today’s world. Unless you've been living under a rock, I'm quite sure you must have heard about the ongoing buzz about bitcoin and blockchain. Even people who haven't heard about cryptocurrency before today are quite interested to know about bitcoins. Well, this concern is definitely genuine because the value of Bitcoin has had an astonishing growth where it touched $19,783.21 value (all-time high in Coindesk) in December of the year 2017. Now, moving on with today's article, here we'll begin by first understanding what is Bitcoin as well as how does a Bitcoin transaction take place. So, I hope you are quite excited, let’s start then.

What is Bitcoin

Moving on to the first topic of today's article, which is, what is Bitcoin. Now, Bitcoin was the first cryptocurrency introduced by Satoshi Nakamoto in 2009. The idea originally came from a white paper published by Satoshi Nakamoto with the name Bitcoin, a peer-to-peer electronic cash system. This is the paper which talks about how a cryptocurrency can be used, and how it can revolutionize the present currency transaction system, and the banking system overall. This came at a time when the current financial system was facing the financial crisis, back in 2008. So, this became a fundamental idea of how this economic crisis can be avoided in the future and can change the currently existing system as a whole. However, apart from being the first cryptocurrency, bitcoin is also a fully digital currency which has no material or physical form as note or coin, it exists electronically only. Now, there may be some concerns if our money exists only on the digital platform, and not in the bank or any other physical form. So, to avoid any misuse, we use various cryptographic and mathematical algorithms which ensure that the creation as well as management of bitcoins are completely secure and can’t be manipulated. We have all seen the issue of counterfeit currency notes in our system, using these technologies, we can ensure that no person or organization can create fake bitcoins. So, these technologies make sure that no fake bitcoins are introduced as part of the system. Now, one thing you need to be aware of is that there can be a certain number of bitcoins maximum, in short, there’s a hard limit of maximum how much bitcoins can exist in the system in total at any given point of time, right now or in the future. While introducing the Bitcoin system, it was said that there can only be 21 million bitcoins ever, out of which, a little more than 17 million have already been mined. There’s no need to be worried though because you can own the smallest fraction of one Bitcoin which is 100 millionth of a Bitcoin, known as a Satoshi, and still be part of the Bitcoin system (and if needed, the system and protocol can be modified to accept even further smaller fraction).

How to store Bitcoin

Now, you may be wondering it's a digital currency where is it going to be stored. Similar to how you save your money in your PayPal wallet, this can also be stored in a Bitcoin wallet. This wallet can be present on your phone, or it could be present on a PC, or it could be present online in a cloud-based wallet, or even on a small handheld hardware device.

How to initiate a Bitcoin transaction

The system or the ledger, where all the transactions are added with respect to the Bitcoin, is known as the blockchain system. This is an electronically distributed ledger system which is distributed across the globe. Now, before we go into the blockchain system and talk more about it, let's first try to understand how a Bitcoin transaction takes place. To give you a better understanding of how a Bitcoin transaction takes place, let's take an example here. Here we have seven people named Thomas, Lily, James, Matthew, July, Adam, and John. They're all part of a peer-to-peer network where each of them are connected to each other. Now, here Thomas wants to send 400 bitcoins to Matthew. So, he would send a signal that I want to send Matthew 500 bitcoins. Now, there are miners, like Lily, James, July, Adam, and John - these are the people who verify all these transactions. They get the signal that Thomas wants to sent 500 bitcoins to Matthew. So, they immediately begin validating this transaction - they start to check if Thomas has sufficient balance in his wallet and is it Matthew that he wants to send these coins. They want to check if this is not a false transaction as such. Now if this transaction is valid, it needs to be stored somewhere, and that place is known as a block. A block basically is a collection of different transactions that are verified. And, at the same time, you have a competition between John, Adam, July, and Lily as to who will create the first block with Thomas's transaction. Once either of them has verified this transaction, they are going to suggest to everyone else as part of the network that this is a valid transaction and the amount can get deducted from Thomas's account and can be sent to Matthews account. Now, you may be wondering why would John or Adam or July actually spend time as well as waste their resources in verifying these transactions. That's where the blockchain system or the Bitcoin system surprises you. For a block that is going to be created by either John or Adam or any miner, this system itself gives them a reward of some bitcoins. This is an incentive which the system provides the miner for creating the new block. Quite surprising, right? Definitely. You also need to be aware that this is precisely how a new Bitcoin gets created, and this is the only way a fresh new bitcoin can be introduced in the system – there’s no other way. So, in case you wondering how bitcoins are getting created, this is the only way, and unless and until a miner completes a block the new bitcoins would not get created. I hope with this explanation, you have got a simple understanding of how a Bitcoin transaction actually takes place, and also how a new bitcoin comes into the system.