Bitcoin, a Virtual Currency System and how it works?
There’s a lot of talk about bitcoins lately, even with the RBI getting involved in it, but most of them are still noobs with the technology. While ‘bitcoin’ refers to the unit, ‘Bitcoin’ with a capital ‘B’ refers to the system itself. The Bitcoin system is a virtual currency system, meaning you do not have to purchase good with notes or tokens. It’s an electronic system where every purchase is immediately logged digitally on a transaction log that tracks the time of purchase and the amount of bitcoins held by various people. This log is usually called ‘block chain’ and people who maintain this log are called ‘miners’.
Like any other currency, the value of bitcoins fluctuate in value relative to other currencies. Now comes the question: What’s the point of having bitcoins if I can use regular currency for my purchases? Why add complexity to your existing monetary system? Bitcoin prevents hassle over traditional cash system and it avoids the 2-3 per cent transaction fee that exists in credit card system. Bitcoin system basically assures transparency and gives full control over the money. Every single transaction must be ‘agreed’ to by both the parties before it goes through. And the biggest advantage yet is that all the information is public. Without revealing the identities of the buyer and seller, the entire bitcoin network is made aware of each and every transaction.
So, how about getting a head-start with this new system? Before getting the bitcoins, don’t we need a container to put them in? Oh yes, you need to get yourself a ‘Bitcoin wallet’. You get these fancy wallets though various online applications. You can download it on your computer and your mobile. Think of it as an ‘app’ that you need to install in your electronic gadgets. With that done, we’re ready to collect some bitcoins. The three common ways to do this are:
- Selling a product or service and accepting bitcoins as a form of payment.
- Purchase and sell bitcoins through ‘Bitcoin exchanges’. These are found (mostly) online.
- Trade bitcoins for traditional currencies of countries.
Let’s get started with the transaction process now. Most of us have played online games that involves gold coins, cash bills and what not. It’s very identical to all that. It is so easy that you can argue that it’s simpler than using credit cards. So, pull out your ‘Bitcoin wallet’
- Enter the recipient’s address.
- Enter the amount of bitcoins to be sent.
- Press send.
And that’s that. Now, the recipient will receive the bitcoins in exchange for the product or service they provide. Bitcoin works off address, it has two components: a public and a private address. Each address has its own Bitcoin balance. So, when a transaction is made, the public address of the user is made public to the entire network. And hence, it’s recommended that the sender creates a new address for each transaction.