What are Bitcoins? What’s up with the fuss about them? Will they be replacing real money in the future? Read on to find out.
In 2008, pseudonymous developer Satoshi Nakamoto described Bitcoin (BTC) in a paper that he published as a cryptocurrency running on a peer-to-peer, electronic cash system. Based on an open-source cryptographic protocol, Bitcoin creation and transfer is decentralized and hence, is not managed by any central authority. Each Bitcoin is further subdivided up to eight decimal places, subsequently forming 100M smaller units called satoshis. Processing of transactions is done via servers called Bitcoin miners. These servers run on a peer-to-peer network and confirm transactions through a periodically maintained ledger. Services rendered by miners are compensated through the creation of new Bitcoins after every successful ledger maintenance. The number of new Bitcoins created is halved every 4 years until 2140, the year Bitcoin creation reduces to zero. By that time, the total number of Bitcoins in circulation is at 21M. Although accepted in trade by several merchants all over the world, the Bitcoin as a digital currency is still greatly criticized mainly because of its volatile exchange rate, relatively inflexible supply and minimal use for traditional transactions.
To start using or mining Bitcoins, you must first get a wallet. The original Bitcoin client is free and open-source, with the current version available in Windows, Mac and Linux. After downloading, simply install the client on your computer. It will then automatically create a wallet for you and start downloading the transaction history. An alternative way to get a wallet is via online services such as Coinbase and MyWallet. Although you wouldn’t need to install anything with this approach, you should be very careful about the password you use and the provider that you will be getting. Once done, you are all set up to receive Bitcoins through your Bitcoin address!
Bitcoin Mining, as mentioned above, is the process of confirming Bitcoin transactions and providing periodic maintenance of the network’s ledger. When mining, the computer runs a cryptographic hashing function on the block header. Basically, what this means is that the mining software uses a string of numbers to describe the block header depending on the current difficulty target. The difficulty target changes every 2016 blocks. The network tries to change it such that 2016 blocks at the current global network processing power take about 14 days. Different means could be leveraged in Bitcoin mining, starting from the common CPU (Central Processing Unit) and GPU (Graphics Processing Unit) down to the more serious hardware such as FPGAs (Field Programmable Gate Arrays) and ASICs (Application Specific Integrated Circuits). Mining could be done either on your own or as part of a pool. Although ultimately both means will generate you Bitcoins, solo mining will give you large, infrequent payouts while pooled mining gives you small, frequent payouts.