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BitCoins: The online Currency explained

BitCoins: The online Currency explained

Hello everyone, today I will be discussing Bitcoins. Some of you may already know of BitCoins but the large majority will never have heard of it. So I will be explaining to you what they are, how you obtain them and what you can use them for.

What are BitCoins?

BitCoins are an online currency (also know as e-cash) that was created in January 2009 by Satoshi Nakamoto. Satoshi is a cryptographer who came up with the BitCoin Protocol. BitCoins are similar to that of local currency (such as that of town’s that have their own currency that you use in local shops) in the sense that the worth of the BitCoin is decided by the online community. The worth of the BitCoin will fluctuate depending on the amount and size of transactions though, unlike national currencies, the value of the BitCoin can quickly recover. At the time of typing this, 1 BitCoin (BTC) is equal to £8.239GBP or $13.32USD. BitCoins come in 3 varieties: You have the BitCoin (1), the Bitcent (0.01) and the Satoshi (0.00000001). All of these can be earned and traded over the internet like normal currency. These will be kept in your BitCoin wallet on your computer. These wallets have their own, unique address (like a bank account number) that will be used to make transactions. The worth of a BitCoin will fluctuate depending on the amount and size of transactions though, unlike national currencies, the value of the BitCoin can quickly recover.

How does it work?

Like all currencies, BitCoin relies on the communities trust in the exchange for it to have value. By the community having trust in BitCoin people will use, buy and sell BitCoin. If no one has trust in BitCoin then no one will use it. Unlike normal currencies, BitCoin doesn’t have a centralized body that issues BitCoins. Instead, BitCoins are rewarded to “Miners” who then sell their BitCoins onto the community. The miners themselves are individual’s that are all connected to the BitCoin network who either work by themselves or in groups (this will be discussed later). The number of BitCoins that can be “mined” is set at 21 million (at the time of writing there are currently 11 million BitCoins in circulation). Once 21 million BitCoins have been mined no more will be created. This is outlined by the protocol that Satoshi came up with. By people abiding by the protocol and trusting in the currency is what gives BitCoins their worth and makes the system work. In order to make counterfeiting impossible, all the transactions are stored on an online database called the blockchain. The blockchain is formed of blocks. Blocks are a list of all the transactions that took place in the space of 10 minutes. Once that 10 minutes is up the block is added to the blockchain and a new block is started. Once 6 blocks are put on top of each other the blockchain the consensus solidifies so it becomes impractical to alter the transactions for your own gain. These blocks must meet constraints, dictated by the network before they are added to the blockchain. This means that it is very hard for a person to cheat the system.

How do you obtain BitCoins?

You can obtain BitCoins in 3 ways: exchanging for actual currency, trading and mining. Exchanging for actual money is used to get you started in the BitCoin exchange. Once you have some BitCoins you can start trading with others in the community much in the same way city traders do. You can buy and sell BitCoins and then exchange them for real currencies. If you own a business you can join the 1000 merchants signed up to BitCoins and start trading your good’s for BitCoins. The main method for obtaining BitCoins is Mining. This is the process of finding a solution to a difficult Proof-Of-Work problem that confirms transactions and prevents double-spending. This would be done by a node (a graphics card) on a dedicated server (it has to be dedicated as it requires a lot of electricity). These transactions are put into files called blocks every 10 minutes and then added to the blockchain (an online public database that has contains a list of all the transactions). The blockchain is only allowed to accept 1 block per 10 minutes. This block must meet stringent constraints dictated by the network. If the block hasn’t formed into the form it should then the blockchain will reject it. The one block that gets accepted onto the Blockchain will get its owner 50 BitCoins as a reward for the work they’ve done. The downside to mining is the time, effort and resources it takes to get the reward. Mining uses a lot of electricity, data and takes place on Graphics Cards so it can be impractical cost money for the individual miner. For this reason, some miners pool their resources together and then split the reward they get depending on the work they’ve done. The only downside to this is you have to give up some of the rewards you get but it can be beneficial in the long run.

I hope this has given you a better understanding of the world of BitCoins. Thank you for reading!

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