How Does Bitcoin Work?

What is it that makes Bitcoin transactions different from shopping on Amazon with a credit card, digitally? Well you might already know that while normal electronic transactions still involve conventional money, Bitcoin is decentralized meaning its distribution and exchange aren't controlled or regulated by a government or other authority, and the technical side of things is also very different. Traditional currency goes through a central payment processor like your credit card company, but all Bitcoin transactions where you're purchasing goods or sending Bitcoins to a friend because you're a nice guy are processed by a large distributed network of computers running special software. So unless you're that lady fishing around in that gigantic purse for a checkbook in the grocery line up, you've probably gotten used to the idea of a paperless post cash economy by now. I mean, who wants to carry around a buncha bills and coins when you can just tap your card and get the same adrenaline rush followed by the same instant regret. Maybe it isn't surprising then that completely digitized forms of currency, namely cryptocurrency are becoming more popular. Today we're going to discuss Bitcoin specifically in a bit more detail because it's the most recognized cryptocurrency at the moment. Whenever a transaction occurs, the network records the senders and receivers Bitcoin addresses and the amount transferred and enters this information on to the end of a ledger, or record called a blockchain. The blockchain is updated over 100 times per day and is sent to every computer that processes Bitcoin, because each transaction is encrypted with public key cryptography, which you can learn more about here, and verified by multiple points on the network to ensure every computer that processes Bitcoin uses identical, correct copies of the blockchain, it is virtually impossible to counterfeit. This verification process is performed by what are called, "bitcoin miners." Computers, or other processing devices that individuals, like yourself, connect to this large processing network. The mining software that runs works by grouping recent transactions into blocks which are only accepted by the rest of the network if the block is hashed correctly, which requires the computer to find correct numerical values, a time consuming and compute-intensive process. But what's in it then for the members of the processing network? Ah, I'm glad to asked. So, what's a computer does successfully process a block, it's added to the blockchain and the system generates a new Bitcoin that goes into the miners' digital wallet as a reward, so your computer ends up literally creating money for you, out of nothing. Wow! Where do I sign up? You can just mine Bitcoin and never work again? Ugh, well it's a bit more complicated than that. It takes a lot of processing power to generate an appreciable amount of Bitcoin, and since the system is designed for it to take about 10 minutes to successfully process a block, the difficulty of mining, generally increases as more nodes join the network. Not to mention, the costs of entry are fairly high. In the early days, you could mine on your spare laptop, then for a while, high-end graphics card were popular choices thanks to their highly parallelized number crunching architectures, but these days, though it should be noted that doesn't necessarily apply to other cryptocurrencies, these days Bitcoin can only really be profitably mined using specialized mining appliances called ASIC miners. Unlike graphics cards, these can only be used for Bitcoin mining in most cases, and they can cause thousands of dollars, each. Oh yeah, and they suck a ton of power too, which due to high electricity rates in many parts of the world, can kill any chances of profitability for the average person. So it's obvious why people are mining Bitcoin, I mean, there's profit to be made, but why do other people want it? Well, some people are mistrustful of banks and governments to keep their money secure and have a lot more faith in Bitcoins redundant blockchain system. Especially as more and more retailers begin to accept cryptocurrency. Others, like the partial anonymity Bitcoin offers the only thing that necessarily ties to a particular Bitcoin address is an encryption key. Plus, you could grab a new address for each transaction you make. In fact, many paid VPN services accept Bitcoin payments for people who are concerned about staying incognito online. The system is designed so that by the year 2140, no new Bitcoin will be produced, leaving some to believe that down the line, it will be more a secure virtual commodity of sorts that will provide a hedge against inflation of transitional currencies. Kind of like how some people invest in gold bars, for the same reason. Which sounds cool in theory but now Bitcoin is a bit of a roller coaster. The value of one Bitcoin recently jumped from a few hundred dollars in 2016, to nearly $20,000 around the edge of 2017.

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