Bitcoin is entirely virtual (no physical coins)
Users of bitcoin have keys that prove their ownership of coins on network
Keys are often stored in digital wallets
Cryptocurrencies use a distributed peer-to-peer system
New currency is generated on the Bitcoin network through the process of mining
Its is an computationally expensive task that references the recent transactions
Transactions on the blockchain are immutable and cannot be reversed
The bitcoin system is composed of 4 main components:
- A decentralized peer-to-peer network
- A public transactional journal (Blockchain)
- Rules for independent transaction verification and currency issuance
- Mechanism on reaching global consensus on the valid blockchain
In the Bitcoin system every 10 minutes on average a user is able to mine a block
Mining adds security to previous transactions
For the miners efforts they are rewarded new bitcoins and transition fee
This decentralizes the currency issuance and clearing functionality of the banks
The difficulty of the mining task is adjusted dynamically so that someone success every 10 minutes irrespective of the number of miners on the network
The total number of coins on the Bitcoin network is limited to 21 million
Half of the remaining bitcoins are added into circulation every 4 years
Since the insurance of bitcoins decreases over time its a deflationary currency
Blockchain Address
Wallets generate public keys that is used to derive the blockchain address
If a bitcoin address is public everyone can see how many coins were sent to it
Access to bitcoin address does not give a malicious user access to an account
To maintain privacy it is suggested to create a new address before each transaction
Getting Bitcoins
Bitcoin transactions are irreversible
Online payments that occur using credit/debit card, PayPal, etc. are reversible
Because of this it is complicated to purchase Bitcoin using traditional money
Approaches to acquire Bitcoins:
- Buy bitcoins from friend
- Earn bitcoins for selling a product or service
- Bitcoin ATM (Bitcoins in exchange for traditional currency)
- Bitcoin exchanges (Exchange local currency for bitcoins)
Finding Price of Bitcoin
Bitcoin has a floating exchange rate (like most currency)
Value fluctuates based on the supply and demand in the markets its used
The price is calculated using the most recent bitcoin and currency trade
The price can fluctuate several times per minute
Pricing services aggregate prices from across markets and calculate a volume-weighted average representing the broad market exchange rate (e.g. BTC/USD)
Some wallets have functionality to perform this conversion automatically