How Bitcoin Works


One can earn money (dollars/pounds/euros) by working, selling things, or exchanging other currencies. Similarly, one can earn bitcoins by mining (working in virtual world), getting paid in bitcoins for selling goods, or purchasing bitcoins by exchanging existing currencies (like US dollars). Earned or purchased bitcoins reside in safe wallets, which are online secure bitcoin storage provided by bitcoin service providers. Wallet owners can use bitcoins for any transactions where the counter party accepts bitcoins. Every transaction gets recorded onto the bitcoin network (through block chains), which authenticates the transaction. (See Related: How Bitcoin Works.)

The Speculative Nature

Any currency’s primary usage is for transaction-based trades, i.e., buying and selling things. Bitcoin is not yet widely accepted by buyers or sellers, and its valuation has been a speculative game, you can even get bitcoin online with services as bitcoin investment 2018. The use of bitcoins for illegitimate purchases (like drugs and gambling) can make buyers pay a premium due to nature of goods or services involved (See Related: How Bitcoin Casinos Work?). Moreover, anyone purchasing legitimate goods or services through bitcoins would make a comparison with the dollar equivalent, and opt for the cheaper option. In the last quarter of 2013, bitcoin was trading above $1200. Since then, it has seen a steady decline. From around $800 in January 2014 to $330 in December 2014 and to yet another low of $170 in early 2015, bitcoin has lost significant ground.

The dotcom bubble may have burst in 2000, but overall Internet use has grown exponentially, making it a mandatory framework for the present day economy. Recent valuations of bitcoin may be perceived as a similar bubble burst. In 2014, bitcoin saw some significant developments, which indicate the long-term positives and adoption potential of the currency (Source: Annual Bitcoin Report by Coindesk):

The largest increase in bitcoin trading volume.
The number of bitcoin wallets grew from 3 million to 8 million.
Large corporations, such as Microsoft, Dell, Expedia and Dish Network, have joined the list of merchants accepting bitcoin.
The number of merchants accepting bitcoins grew from 36,000 to 82,000.
The number of bitcoin ATMs grew from just 4 to 340 worldwide.
Venture capital investment in bitcoin shot up significantly, from $98 million in 2013 to $335 million in 2014.
Yes, bitcoin valuations are at rock bottom, but these recent developments demonstrate the strong future potential of the currency. And venture capitalists, pouring in large amounts of capital into the currency, are in it to reap great returns from long-term potential.

A rare combination of technology and finance with global reach, bitcoin’s framework is impressive. Its real potential is not in its high exchange rate valuation or in providing an additional virtual currency that is free from governmental or political interference. Bitcoin’s potential lies in its underlying technology, a secure system with built-in authentication of transactions and record keeping, which could change the global financial ecosystem.

Future of Bitcoin Adoption

To transfer money to a friend, my bank takes a cut for providing services. To purchase a house, I pay significant fees for registration and stamp duty charges to register my ownership in multiple books and records. Through digital labeling, the indelible record of a bitcoin transaction has the potential to eliminate such third parties (and their costs).

Zerohedge cites findings by a Goldman Sachs analyst, “in 2013 money transfer fees would have fallen by 90% if bitcoin had been used…Global transaction fees at retail point of sale, meanwhile, were $260 billion on over $10 trillion of sales. Using bitcoin, those fees fall by almost $150 billion to $104 billion.” In addition, currently credit card companies charge 2%-4% to retail merchants. Using charge-free bitcoins would be a game changer for small businesses running on thin margins, as these are businesses with low sales volumes.

A World Bank report estimates that by 2016 international remittances will be worth over $700 billion. Banks and money transfer services take significant cut ranging from 4% to 10% on the transferred amount. This charge may be direct (such as a standard quoted percentage) or indirect (such as a less favorable forex rate). Bitcoins allow free transactions beyond geographical boundaries (or for a simple 1% charge if using bitcoin service providers like Coinbase or Bitpay). A mere 3% savings on such transactional costs on the projected figure of $700 billion would result in a savings of $21 billion, leaving more money for the end consumers.

The potential of bitcoin is not limited to transactional cost savings. A Bloomberg report from 2012 noted that more than half of the world’s population does not have a bank account, although mobile penetration is above 75%. Imagine bitcoin payments through mobile apps that could enable money transactions over remote distances at no extra costs.

The secret of bitcoin lies in the underlying “block chain” – a secure digital ledger on bitcoin networks that keeps track of bitcoins by recording every single transaction. It facilitates agreement by all parties as to who owns how many bitcoins. A bitcoin wallet holder will have an exact replica of the block chain on the secure public bitcoin network, which virtually overrules any attempts of counterfeit. Read this Crypto Code review to learn more about how it works and what constitutes a legitimate transaction.

This block chain currently tracks and records money movements – buyer A paid x bitcoins to seller B. However, the same block chain can be utilized to record transaction details to include title deeds and transaction details, which can act as public records. It could nullify the costs of title registration, ownership, and record keeping.

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