Bitcoin- What Is It And How It Works

Bitcoin is the most revolutionary thing breaking the internet. First Bitcoin was used to purchase two pizzas on 22nd May 2010 for 10,000 Bitcoins.

Amitabh Bacchan’s (Bollywood Superstar) wealth was eroded by approx. Rs 350 crores due to fall in price of Bitcoins. Current value of one Bit coins is Rs 6, 43,000/-. This value was Rs 14, 00,000/- in December 2017 straight downfall of approx. 54% in the value of Bitcoin in last three months.  Some countries tried to ban it but could not as it is not illegal.

In this article we will try to explain what Bitcoin is and how does the whole thing works.

So, let’s start with the most crucial and commonly asked question:

What is Bitcoin?

The function of any currency in the world (Dollar, Yen, Rupees etc.) is that it is used as a centrally accepted medium for purchasing and selling. For e.g. we use our currency i.e. Rupees to purchase or sell anything. Say to purchase a car or for purchasing new clothes etc, we use Rupees i.e. currency. Same way Bitcoins are nothing but Crypto Currency. It means currency which uses Cryptography (digital coding). It is a digital currency which cannot be touched. Since Bitcoin’s nature is same as that of any currency in the world, hence it can also be used as a medium of payment.    

The main difference between Bitcoin and our currency is that cryptography ensures that Bitcoin in circulation are authentic and original while no such technology is used in our normal currency, that’s why fake currency notes are there in circulation.

There is an anonymity about the founder of Bitcoin but some says that Sathosho Nakamoto is the one who created Bitcoin in 2009. Several attempts by several person have been made to investigate the existence of SATOSHO NAKAMOTO but no success has been achieved till date.

The main reason behind the introduction of Bitcoin was to eliminate the mediator. To understand this, let’s take an example from our day to day life. Suppose Ram wants to transfer Rs 10 lakhs to Ganesh through a Bank. Here, Bank work as a mediator.

Bank will check that Ram’s account is having 10 lakhs or not. If yes, then it will approve the transaction and money will be transferred from Ram’s account to Ganesh’s account.

But in crypto-currency like Bitcoin, things works differently, as there is NO MEDIATOR in the process. It means if Ram wants to transfer 10 lakhs Bitcoins to Ganesh, then he can directly transfer and there is no bank/mediator in between.

Let’s Understand How Bitcoin Works.

  • To purchase a Bitcoin, we need a wallet. Currently there are 11 wallets in India from where we can buy Bitcoin. It includes Zebpay, Unocoin, Coinsecure, Buyucoin, Coinmama, etc.

  • Every wallet has its own address like your Bank Account no. If someone wants to send Bitcoin to another person they will use the wallet address to transfer the Bitcoin.

  • Every wallet will have a public key & private key.

  • Suppose Ram wants to send 1 lakh Bitcoins to Ganesh. In such a case, whenever a transfer will take place, the system will generate Ram’s digital signature. Computer will verify the transaction authentication with the help of Ram’s digital signature. (These computes are connected with Bitcoin network). Computer verifies whether Ram is authorized person to transfer Bitcoin or not, if yes then whether Ram’s wallet has 1 lakh Bitcoins or not, once verification is done by computer, Bitcoins will be transferred to Ganesh’s Wallet.

  • Bitcoins works on BLOCKCHAIN concept or simply PUBLIC LEDGER. Just the way Bank records all our transaction in our passbook same way there is a PUBLIC LEDGER which records all transaction in Bitcoins. The only difference is that our passbook will have details of our transaction only but PUBLIC LEDGER will have history of all transaction across globe happened through Bitcoin.

  • As records in Passbook are maintained by Bank employees, similarly in crypto currency we have MINERS who maintains all transactions in PUBLIC LEDGER/BLOCKS. The main role of miners is to maintain the public ledger. For this service miners get Transaction fees and Bitcoins. These Bitcoins are the NEW Bitcoins. No new Bitcoins can be added in circulation except this route i.e. through MINERS.

  • Public ledger or Blocks comes with a limited size only. It means a limited number of transactions can be recorded in Blocks. Once block is filled new block or ledger is created to record subsequent transactions. Hence block after block is added because of which the name BLOCKCHAIN came into existence.

  • Once one Block is completed MINERS are required to LOCK that BLOCK to prevent further manipulation in the block. Once blocked it is then added to Bitcoin network.

  • In order to lock a block, MINERS have to solve a challenging puzzle. The miner who solves the puzzle fastest gets rewards in the form of transaction fee and Bitcoins. As the numbers of Miners is high, the puzzle is made in a very complex manner. Currently on solving one puzzle MINERs get 12.5 Bitcoins.

 

NOTE: It is not necessary to buy Bitcoins in fixed numbers. Bitcoins can be bought in fraction (SATOSHI) also.

1 BTC = 100,000,000(10 crore) SATOSHI.

As we have come to the end of this article, I hope you got  the basic idea about what and how Bitcoin basically works.

Do you like this information? Shoot in your views in the comments section, also let us know your views about the future of bitcoins and crypto currency.

Divya Rai

A CA by profession, currently working as a tax expert with India's leading Government Petroleum firm.

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