A bitcoin is a digital currency that can not be printed or minted. It is easy to assume bitcoins as gold coins with an alphanumerical 'B' printed on them. In fact, all those stock images are representational and bitcoins does not exist in a physical form. So how does this invisible digital currency hold value and how does it work?
Since bitcoin is a digital currency, moving them from one place to another requires computing power. This is done by users called 'miners' who break complex puzzles and allow their computer to be used by the system to verify transactions. For every contribution, they are rewarded with new Bitcoins.
How are bitcoins transacted?
Consider you are purchasing a bag of chips at a store. Here, you are making the payment through your debit card. In this transaction, you have your debit card, the bank that verifies the transaction and the money being transferred. Bitcoins are not much different. Each bitcoin user's wallet consists of his or her coins and data related to it which is connected to the Bitcoin system. When a user wants to make a payment or transfer money, he sends a request to another user. The other user has to agree to receive the payment. When both parties agree, the peer-to-peer Bitcoin system verifies the transaction. Thus, there is no centralised bank or authority to control the transaction.
Like real world currency, the use of bitcoins is increasing rapidly with more and more merchants, vendors and users using it to bypass taxes and earning returns.
Bitcoins can be used to carry out real transactions. First, you must buy bitcoins through either your credit card, bank account or cash. Your bitcoins are transferred to your digital wallet. This can then be used to transfer or receive money without an OTP or a bank interference. When a middleman is excluded, the associated fees is decreased.
Bitcoins are self-contained. They hold value like gold nuggets in your pocket whose value fluctuate over time.
Are there any fees involved?
Yes. In spite of banks being excluded as middlemen, a small fees must be paid to the network of miners, the servers who support the miners and the online exchanges that convert your rupees to bitcoins. But transactions are much cheaper than banking or digital transactions.
If you are a new user, you can simply start by downloading a bitcoin wallet on your smartphone or computer. To make a transfer, you can create a unique address and share it with the receiver. Multiple addresses can be generated whenever you make a transaction. These addresses can be used only once much like an OTP.
The entire bitcoin network relies on a public ledger called blockchain. Every user's transaction data and balance is stored in the blockchain. So, whenever a transaction of bitcoin is made, the record is maintained and updated regularly. Each bitcoin wallet keeps a secret seed, also called as private key, which is used to sign transactions. This key verifies that it has come from the owner of the wallet.
An exciting fact
Today, there are more than 2 million dollars worth of bitcoins in the world. Bitcoins will stop being created when the count reaches 21 million. It is estimated that by 2140, no more new bitcoins will be created. Half of the limit of bitcoin creation has already been reached.