Wednesday, 8 January 2014

Bitcoin: The mysterious currency

Current rate (17:19 GMT, 8th Jan 2014): 1 BTC=859.2 USD=53330 INR
Last year (8th Jan 2013): 1 BTC: 13.74 USD=753 INR

Bitcoin a very much discuss topic in recent time in global currency market. Very few people know totally about this mysterious digital currency. 

Let’s have brief introduction of bitcoin:

1. What is bitcoin and Bitcoin?

Bitcoin is per to per payment system without any central authority; network for bitcoin transition. On the other hand bitcoin is a digital currency. Bitcoin introduced as open source software in 2009 by pseudonymous developer Satoshi Nakamoto. It is a crypto currency, so-called because it uses cryptography to control the creation and transfer of money.

2. How it works?

To do transition using Bitcoin one need Bitcoin ‘Wallet’.
Wallets allow a user to make and accept payments using Bitcoin. At the most basic, a wallet stores a public key, which some refer to as a Bitcoin address, and its associated private key. Let’s take an example:
Here is an example of a Bitcoin transaction:
  • Adam owns an online store that accepts bitcoin as a form of payment.
  • Eve wants to purchase a $2400 item. He looks online and sees that the prevailing rate for bitcoins is approximately $800/bitcoin.
  • Adam is selling the item for 3 bitcoins on his website.
  • Eve creates a new Bitcoin address through his wallet. He can see Adam's public Bitcoin address on Adam's website. 
  • Just as a seller does not need to know your physical identity if you pay cash, Eve never needs to disclose his identity to Adam and can thus remain completely anonymous.
  • Eve instructs his Bitcoin client (the free Bitcoin software he installed on his computer/mobile) to transfer 3 bitcoins from his wallet to the Adam's address. This is the transaction message.
  • Eve's bitcoin client will electronically "sign" the transaction request with the private key of the address from where he is transferring his bitcoins. While Eve's public key is available to anyone for signature verification, his private key is only known to him.
  • Eve's transaction is broadcast to the Bitcoin network and will be verified in a few minutes by miners. The 3 bitcoins have been successfully transferred from Eve's address to the Adam's address.

3. What is Block Chain?

Each transition of bitcoin is public transition log, the block chain. Each payment transaction is broadcast to the network and included in the block chain so that the included bitcoins cannot be spent twice. After an hour or two, each transaction is locked in time by the massive amount of processing power that continues to extend the block chain. Using these techniques, Bitcoin provides a fast and extremely reliable payment network that anyone can use.

4. How to obtain bitcoin?

The main ways to acquire bitcoins are: exchanges, mining, and selling products or services for bitcoins.
Daily Bitcoin are buy and sell in global currency market.

5. What is mining?

Mining is the process of spending computation power to secure Bitcoin transactions against reversal and introducing new bitcoins to the system.
Technically speaking, mining is the calculation of a hash of the block header, which includes among other things a reference to the previous block, a hash of a set of transactions and a nonce. If the hash value is found to be less than the current target (which is inversely proportional to the difficulty), a new block is formed and the miner gets the newly generated Bitcoins (25 per block at current levels). If the hash is not less than the current target, a new nonce is tried, and a new hash is calculated. This is done millions of times per second by each miner.

5. Why bitcoin?

Well there are many benefits to bitcoins over traditional currencies. For example, let's assume you need to purchase an item for INR 10,000, but the seller doesn't accept credit cards or bitcoins; he only wants cash. You now need to scrounge around for INR 10,000 and pay the seller in hard cash; the seller, on his side, has to somehow ensure that the money you're giving him is not counterfeit. Just the hassle of having to pay him INR 10,000 in cash is what Bitcoin prevents. If you have at least INR 10,000 worth of bitcoins (after converting rupees to bitcoins) and the seller accepts bitcoins, the entire transaction is completed in less than 10 minutes.

But, you say, the seller is willing to accept credit cards. Well, this is where the seller would much rather want to accept bitcoins versus traditional credit cards. There is usually a 2 - 3 per cent transaction fee for every credit card transaction that the seller needs to pay. With bitcoins, there are little to no fees involved. So the seller has a strong incentive to accept bitcoins.

6. Risk associate with Bitcoin?

As whole Bitcoin network works over internet there is always risk of hacker to find loophole in network. In 13 June 2011 a Bitcoin user claims that hackers stole 25,000 bitcoins from him, worth around $500,000 at the time. Those bitcoins would be worth around $2148000 today.

Different country have different view on Bitcoin .USA is most friendly with Bitcoin operations. While on other hand China introduced a series of prohibitions on Bitcoin trading.
In December 2013 RBI published an official warning to the public, cautioning users of virtual currencies about the "potential financial, operational, and legal, customer protection and security related risks that they are exposing themselves to."

But As Mark Twain popularly said, "The more things are forbidden, the more popular they become."

It is interesting to see how in future this mysterious currency bitcoin impact global currency.


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