What are Bitcoins and How Do They Work?

Bitcoin is the first of the digital currencies to have made its mark in the world of finance. It is a decentralized digital peer-to-peer currency that is not controlled by any third party like a government or financial institution. So, it is like digital cash and you may use Bitcoins for buying products and services; many merchants have started to accept Bitcoin payments while some countries have completely banned Bitcoin use.

How Bitcoin Works:

Every Bitcoin is a computer file that is stored in a digital wallet to keep it secure from theft. Using websites and apps, you can transfer Bitcoins from your computers and smartphones. So, you may send Bitcoins to your wallet and even to other people. All transactions will be recorded in a blockchain or public ledger for everyone to view. While the amount of transactions remains transparent, the identities of the parties involved in Bitcoin transactions will remain anonymous.

Bitcoin miners run expensive mining rigs with specialized computers that can solve complex cryptographic puzzles to generate Bitcoins. When a block is mined successfully, it gets added to the blockchain and the miner is rewarded with Bitcoins. The ledger is secured against frauds through a trustless system. Bitcoin’s creator had thought of 3 key concepts when coming out with the Bitcoin, namely, cryptography, supply-and-demand, and decentralized networks.

Bitcoin makes use of cryptography for converting transactional data. This is done through the blockchain. Bitcoin has a finite supply; there can only be a maximum of 21 million Bitcoins and no more. So, when a product is limited the value will be more. The more the demand for a coin, the higher its prices will be. Bitcoin follows this principle; since it is generated at a fixed rate it is going to decrease in number as time passes by.

Finally, the Bitcoin runs on a blockchain which comprises of many blocks of data that are arranged chronologically. The blocks have a unique hash each which is a series of numbers and letters. Any contract between parties may be established on the blockchain when both agree to this contract. So, there is no need for any third party to act as a middleman. This has opened a new avenue of possibilities like loans, decentralized savings, peer-to-peer financial products etc where no banks or financial institutions are necessary. When you use automated bitcoin trading applications such as immediate bitcoin software, there is no need of middlemen or manual efforts as the software executes the trade 24/7 autonomously.

Bitcoin blockchain is public which means that records can be viewed by one and all. So, there are complex means for updating this ledger as there is no centralized authority for keeping track for all Bitcoin transactions. This is why the transactions are verified by a network of computers or nodes spread all over the world. If anyone tries to tweak the data in any block it is going to lead to a data change only in that block. But to make the change uniform, data in every block has to be changed. This requires the hacker to have more than 51% control of the computing power and that is practically not possible for him. This is what makes Bitcoins so secure because data once entered cannot be tampered with or destroyed.