BitCoin

BitCoin

BitCoin[87] is a decentralized Digital currency, like virtual cash or gold. It is transferred from person-to-person, so there is no bank or government prerequisites or control. It is really only a Digital File or Ledger that contains names and balances, and people exchange money by changing this file. The amount of BitCoins is limited; it is very cheap to transfer them from one part of the world to another.  When A sells B a lawn-mower for 10 BitCoins, A’s balance goes up by 10 and B’s goes down by 10. There’s no gold or government issued money backing these numbers. A is only willing to trade his real-life lawn mower for a higher number in this digital file because he has faith that other people will also trust the system.

BitCoin is built to avoid any centralized control, so every participant maintains their own copy of the ledger. It is very transparent, in the sense that everyone can see everyone else’s balances, although the real system only uses account numbers and not names, so there’s some level of anonymity. When money is transferred, this is broadcasted to everyone else with the account number, the receiver’s, and the amount. Everyone across the world then updates their ledger. The system can also be used to send and receive money, without maintaining a ledger. BitCoin is very safe, in the sense that it requires a kind of signature to prove that the sender is the sender and the real owner of an account, but it’s based on math rather than handwriting.   In the world the majority of the population does not have access to banking services. Cross-currency purchase & transfers are expensive and have friction. BitCoins have value since they are scarce, decentralized, Peer-to-Peer, can be anonymous, transparent, trusted, easy to buy and sell, extremely low transaction fees, irreversible. It is not backed by anything tangible, except the trust that the people have in the BitCoin system. The value comes from whatever people are willing to pay for it. The are several ways to profit from them: Mining, and then sell them; Invest and trade; Offer discounts in products/services for payment in BTC. 

BitCoin operates as a Peer-to-Peer Network. The one who uses BitCoin is a tiny fraction of the bank of BitCoin. With paper money, the government decides when to print and distributes money. BitCoin doesn’t have a Central Government. Miners use a Software to solve math-problems, and issues a certain amount of BitCoins in exchange. This creates a smart way to issue the currency, and also creates an incentive for more people to mine. And since miners are required to approve BitCoin transactions, more miners mean a more secure Network. The BitCoin Network automatically changes the difficulty of the math problems, depending on how fast they are being solved. Miners discovered the graphic cards used for gaming were much better suited to this kind of math. ASIC (Application-Specific Integrated Circuit chip) are designed specifically for BitCoin mining. This technology has made mining even faster while using less power. As the popularity of BitCoin increases, more miners joined the Network, making it more difficult to solve the math problems. Mining is an important part of BitCoin, which keeps the Network safe, secure and stable.

What will happen to money in the future? In the past, Gold and Silver coins were used as currency and had value since they were scarce. Paper money, backed by gold, replaced metal as currency. The Gold standard was abandoned by the US in 1971, when the USD was established as reserve currency worldwide. The bank system is a little more complex than what people think. For every USD that is deposited, the bank actually holds a 1/10th as reserve. The rest is “virtual” money.

The bank then lends this virtual money to borrowers, who are committed in the form of Debt. What happens if all the depositors want to withdraw their money simultaneously? The bank goes bankrupt. That is why banks run credit analysis and lend money not indiscriminately but based on statistics and payment possibilities. BitCoin represents an alternative to traditional banking, by cutting off the middle man and connecting supply and demand. Would you prefer to get BitCoins in return for your services instead of USD? The risk is that there is no physical reserve, nothing to support the system except for the trust that the users themselves deposit in them. It is literally a virtual currency. Can it resist the test of time? What happens if there is a failure, or crack in the system? Only time will tell… Eventually, physical money will be fully replaced by virtual. How long will it be until we are paid in credits? Not as long as we think!!!