What is bitcoin and why is so popular?

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What is bitcoin and why is so popular?

Bitcoin is widely accepted as being the first cryptocurency or virtual currency. The concept was first conceived by an unidentified group of programmers known as Satoshi Nakamoto in 2008. In 2009 it was made available as open source software.

The principle behind bitcoin is that of a mathematical formula, the currency is not controlled by any central bank. Unlike traditional currency, bitcoin's value is not determined by gold or silver.

Essentially bitcoins are created by users who offer computing power which is used to verify and record transactions. These users, known as "miners" are then rewarded with a transaction fee in bitcoins. Bitcoin miners are able to use their currency for online trade.

By February 2015 there were over 100 000 vendors accepting bitcoin as payment for goods and services. Because it is independent of central banks, it's value cannot be manipulated by political pressure. The currency's value is determined purely by demand.

The total number of bitcoins that can be created is limited to 21 million - making it a finite commodity. As the currency has grown in popularity it has become open to speculative trading by investors who hold bitcoins to sell when the demand increases.

There has been much debate over the security and long term validity of bitcoin trade. Concerns have also been raised over the use of bitcoins for criminal activities as transactions are not tracked or controlled by banking institutions.

Despite these concerns, it continues to grow in popularity and therefore in value.

Bitcoin History

The story of crypto-currencies is the continuation of the saga of the economy and the exchange of goods in human society. The development of the Internet is enabled by a new chapter in this epic tale. The possibility of decentralized currency by individuals.

The number of devices on a global network grows exponentially. The feeling that we are more connected than ever is also growing. However, we are all connected in the same way. Our access technology is different, and the speed of our network even more.

For the vast Internet population in Africa, for example, the mobile phone is the only way of communicating with neighbors and the whole world. In addition to this, we should add that currently on the planet there are more people with Internet access than those who have in its vicinity any fair means of payment or sending money.

The story of bitcoin as a unique type of digital currency should start by mentioning a few names, one of which is directly associated with the emergence of the first ideas about bitcoin. We will begin by Satoshi Nakamoto. This Japanese man first developed the idea of bitcoin describing him as a peer-to-peer electronic cash system and decentralized means of payment.

This idea was initially forwarded via the mailing list on the website metzdowd.com, 2008. A little later, on January 3, 2009. the first version of bitcoin software "open source" was put into operation.

After years of research, the media remain deprived of the answer to the question who is the anonymous Satoshi Nakamoto. In fact, in recent years many entities are represented as Satoshi and are most likely talking about a group of people.

Bitcoin is probably not the idea of one person, but several "collective internet." However, if we want truly to differentiate the idea behind the proposal on bitcoin, we must go back a little back in 1998, when another man named Dai Wei published his work 'proposal for the formation of b-money' which was distributed for the first time on the 'Cypherpunks' mailing list; an open forum that brings together lovers of cryptography, experts in this field, mathematicians, statisticians, programmers.

This is important because the basic idea of a decentralized currency lies in the crypto-anarchist movement and the idea of CypherPunk. Basic ideas of CypherPank, by which Wei was inspired, were propagated by the Tim May (Intel's chief engineer and inventor to 2003), Eric Hughes (Professor of mathematics at the University of Berkeley) and John Gilmore (founder of EFF, Electronic Frontier Foundation's). "I want a guarantee that our communication is private, and it is not based on the laws, but in mathematics and physics," wrote Hughes.

The basic postulates of the crypto-punk manifesto (formed in 1993) can be seen in a few sentences:

- Privacy is essential for the development of an open society in the electronic age.

- We cannot expect governments, corporations or other organization to guarantee our privacy.

- We have to defend our privacy if we want to have it.

Some of the founders of the crypto-punk movement are quite elderly people, directors of advanced technology companies, university professors or researchers in the field of mathematics and cryptography. The phrase "punk" in the name of the movement clearly suggests that this is kind of 'mathematics with an attitude. 'We do not care if people disagree with the programs we write. We know that the program (software) cannot be destroyed, and we know that widespread systems cannot be extinguished, 'they wrote in their manifesto.

The idea of Tim May about cryptoanarchy delight Wei so in his work he describes the basics of crypto-currency. Protocol in which basic parts that make community can anonymously communicate almost at the same moment without monitoring or controlling by a third person in the process, usually the state or the central economic institution.

"Creating Money; Anyone can create money if find a public solution for the previously unsolved mathematical computer problem. "(Dai Wei proposal for b-money) And most important, is represented by 'proof of computer work' (proof-of -work), as legitimately the medium for 'making' money.

So what has made bitcoin such a popular currency?

1. Bitcoin is a decentralized currency

Because bitcoin is not controlled by any central bank, it cannot be affected by changing political or financial policies determined by a particular government. It has happened several times in history, most recently with the banking crisis of 2008, that central banks will print money with no real backing.

Making more money available without sound financial reasoning, devalues the currency and promotes inflation. Bitcoin is limited to 21 million coins, so no extra units can be "created". The finite supply of the currency means that its value is determined purely by demand and cannot be manipulated by political interference.

2. Anonymity

A bitcoin transaction is the online equivalent of a cash sale. While this has the negative drawbacks of no legal recourse to fraudulent sales. It has all the benefits associated with conventional cash transactions.

3. Transparency

Bitcoin was created with maximum transparency in mind. Transaction ledgers are constantly being updated as transactions are verified. The bitcoin ledger is openly available online allowing people to monitor the flow of the currency. This makes currency manipulation easy to detect.

4. Low fees

Bitcoin charges for transactions are minimal. This is particularly valuable for international transactions where foreign exchange is used. Forex fees and commissions can become expensive for businesses and individuals doing regular international transactions. Using bitcoins eliminates the need for Forex brokers.

For those who've never used bitcoin, it may seem a little confusing.

So how does bitcoin work?

Any one can buy bitcoins from a bitcoin trader using any currency - as long as the trader accepts the particular currency. The exchange rate for the currency you're using will be determined by the current bitcoin trade value.

In order to use your bitcoins you need to install the appropriate software for the device you're using for online transactions. Essentially you store "keys" to your online bitcoin address in a bitcoin "wallet". These keys allow you to access and use the bitcoins that you've accumulated.

A bitcoin transaction works in the same way as a cash transaction, the only difference is that the coins move within the virtual realm of the computer network. So for example, I sell you 1 bitcoin for $100 - you will pay me a hundred dollars in cash or through bank transfer and I will will give you a digital key to access 1 bitcoin. You then trade the coin for goods or services through vendors accepting bitcoins.

While a bitcoin transaction works as cash, the IRS sees it a little differently. Because the value of bitcoins change against the dollar (or any other currency), one cannot account for it as regular cash.

For tax purposes, bitcoins are viewed as property. Declaring your bitcoins will be determined at the current market value. Accounting software suppliers have become aware of the importance of virtual currencies in business and most provide for this.


Ulterior States - Real-life conversations with some thought leaders within the Bitcoin ecosystem. The film took 3 years to complete.

The Bitcoin Doco - Fascinating story focusing on the emergence of new world wide currency.

Bitcoin Proof of Work Concept

Since the introduction of currency as means of trade thousands of years ago, one principle remains the same. Any traditional form of currency is based on a promise. When central banks came into existence in 1600's the promise by the bank was to hold a predetermined amount of gold or silver for every coin or banknote issued.

This means that a banknote or coin constitutes a promise to pay the barer in gold or silver to the value of the coin or bank note. Over time currencies have become more complex, particularly in countries using the FIAT system which is based on the trading value of currency, known as a floating currency. However the principle remains the same - all currency issued by central banks relies on a promise. This requires the user to trust the system.

A cryptocurrency like bitcoin has no central authority. This means that there is no entity taking responsibility for the currency - there is no promise to the user. Essentially bitcoin users have to trust the blockchain system. The bitcoin blockchain is controlled by a global community of miners. Each miner is an individual motivated by personal gain - the desire to earn bitcoin bonuses through having their block accepted into the blockchain.

Without some form of control, their can be no promise to the user that their bitcoins and transactions are secure. This is where proof of work plays an essential role in the peer review mechanism. Every miner wants their block to be accepted, this makes it a race against time to produce the first block to be accepted into the chain.

In order to slow the process down every block contains what is called a nonce. This is a string of meaningless data that has to be decoded in order for a block to be accepted as the next in the chain. The primary motivation for a miner in using their time and computing power is to solve the nonce problem. This forms the basis for their proof of work.

The proof of work system was invented in order to control whether the information came from users or spammers in order to prevent denial of service attacks and other service abuses such as spam by requiring some processing work from the service requester. Solving the nonce problem is merely a process of trial and error, using computing power to run different combinations of the nonce sequence until the right combination fits. This means that having a block accepted relies on luck - the first to find the "lucky" combination will win the bonus.

On the surface this seems like a waste of time and energy. However this serves two basic principles. One is to slow miners down in order that bonuses aren't paid too quickly, thereby depleting the bitcoin reserves. However it plays a more critical role, that of ensuring miners work ethically. The bolckchain system relies on computing power above that of human input. In order for miners to manipulate the system, they'll have to take time and computing power to alter the data contained in a particular block.

This time delays the process of solving the nonce. In order to earn their bitcoin bonus a miner has to be the first to solve the nonce. The incentive created by proof of work prevents miners from wasting time trying to alter or falsify the transaction data of a block and focus on soling the nonce problem. In the end time spent hacking the system is time that should have been used to solve the seemingly meaningless mathematical problem.

What this means for bitcoin users is that the value of their currency and the safety of their transactions is better protected than that of conventional banking. Every bank note has the words "I promise to pay the barer...." printed on it. However this promise has no real backing. It's a promise based on political will and people's belief in the powers controlling the central bank.

The bitcoin proof of work system removes the human element from the equation and places the users faith in mathematical principles. The fact is that mathematics can have only two arguments - true or false. A monetary system that is based on political will is subject to an endless set of criteria and can change at any time.

Bitcoin mining is a term used to describe the process of adding information to the Bitcoin ledger. Sets of information for a particular time period, known as blocks are verified using a mathematical formula.

Miners who succeed in solving the mathematical formula, add the block to the block chain - this is the collection of blocks that record every bitcoin transaction from its inception.

Miners are rewarded for their efforts with a bonus. The bonus paid to a successful miner is 25 bitcoins, however since there is a finite amount of bitcoins that can be created (21 million), this bonus will decrease as the network grows.

Miners are also paid the fees charged for the transactions contained in the block that they add to the chain.

Understanding Blockchain

The innovation that made virtual currencies possible was the formulation of the blockchain principle. The idea behind a secure chain of blocks containing data sets was first suggested in 1996.

However, it was only in 2008 when Satoshi Nakamoto conceptualized blockchain that the idea became a reality. This development is what made Bitcoin possible.

The initial problem facing the development of a working digital currency was that of double spending. This happens when a transaction is recorded twice, thereby making it impossible to properly regulate the use of a virtual currency.

The solution came by recording each transaction with a unique time stamp, this transaction is described as a block.

Once a transaction is time stamped and recorded as a single block it cannot be altered or reversed. The information contained in a block is never deleted, it forms a block in a chain that starts from the first time a user sets up their digital wallet.

The information recorded for the transaction involves the date and time of the transaction, as well as the source and destination of the transaction. When a block is recorded it replaces the block immediately prior to it. All the blocks form a chain, that can be traced to the original source of the bitcoin.

Using a chain of blocks that trace the movement of each Bitcoin makes the system completely transparent and free from the oversight of an external control authority. It is, therefore, a completely autonomous system relying purely on mathematical and accounting logic.

At the core of its ability to remain autonomous and tamper free is the time stamp principle. Microsoft created a time stamp server to prevent hackers from being able to tamper with online information.

Every Bitcoin user has a "key" used to access there Bitcoin information. When a user logs into their account, the information is recorded with a unique time stamp for that transaction.

All transactions are recorded in a series of blocks arranged in chronological order. Through the Bitcoin peer computer network, every transaction is logged and stored, each in accordance with time stamp assigned to that transaction.

The blockchain database is controlled by independent computers belonging to Bitcoin miners. Miners are paid in bitcoins for offering computing power to the blockchain peer network.

When a block is created several sets of information are recorded. Every block contains a link to the block immediately preceding it. The block will also contain transaction details - the address from which the bitcoins were sent and the address to which the bitcoins are sent, as well the Bitcoin value of the transaction.

The amounts recorded on either side of the transaction have to balance in accordance with a ledger system. Once the transaction has been verified by the peer computer network, the time stamped transaction is recorded as an individual block.

Once a block is entered into the chain it is permanent, it cannot be moved or altered in any way. This block will be the current status of that particular key until a new transaction takes its place.

Because multiple transactions are being conducted over a broad computer network, a system of precedence has to be implemented. Every block has a mathematical algorithm for storing different versions of its history. The block with the highest scoring value will be favored other others.

Within the peer group of connected databases, each computer may not have the same data at the same time. Each system will hold the block with the highest value until an updated block is received.

Every time a database receives a block with a higher value, it is updated and the new block chain is transmitted to other peers in the network. When a block does not fit into the chain it becomes known as an orphan.

Orphan blocks are not included in the chain until updated information is received allowing this block to be integrated into the chain.

The value scoring system ensures that each peer in the computer network has the most current block chain. The verification of transactions via a peer computer network means that it can take up to 20 minutes for a transaction to be verified and permanently form part of the blockchain. This allows the systems to be updated and ensures the validity of every transaction.

The blockchain system of digital currency control has proven itself to highly effective. It provides Bitcoin users with a very secure online platform through which they can transact. This system has been adopted by all subsequent digital currencies and is used for a variety of other data control applications.

Bitcoin was the first to use the blockchain method to control data and their database contains information about every bitcoin transaction that has taken place, back to the first Bitcoin ever issued.

How bitcoin mining works

The reason the process is called mining is because it compares to the extraction of minerals from the ground. Like gold or silver, bitcoins are a limited commodity, miners are rewarded for their efforts with newly "extracted" bitcoins.

The point of bitcoin mining is to ensure that information is controlled by a peer to peer system, when a miner successfully solves the mathematical puzzle and submits a block to be entered into the block chain, other miners in the network have to accept it as being accurate before it can be included in the chain.

This peer network system prevents double spending, that is when a bitcoin is entered for more than one transaction. It also ensures that the correlation of data contained in a block is accurate and has not been tampered with.

When miners receive a block they apply a mathematical formula to the information contained in that block. This converts the information into a smaller data set known as a hash. The hash appears to be a seemingly random set of numbers and letters starting with a specific number of zeros.

The bitcoin creators have intentionally made this a complex process. Every hash has to be unique while at the same time accurately represent the information in the prescribed block.

This will require a process of trial and error by the miners. It may seem counterproductive to deliberately increase the work load for miners. However this is in order to ensure that miners spend an appropriate amount of time when earning their bonuses, if this were not the case bonuses would be paid too easily and the supply of new bitcoins would become exhausted in a short period of time.

In order to qualify for a bitcoin bonus, miners have to submit a "proof of work", this calculates the cost to the miner in terms of the time, computing power and electricity consumption it took to create a particular hash.

Once a miner successfully solves the problem and creates a new hash for a specified block, it is posted to the network. Other miners on the network then verify the validity of the hash that has been created.

If the hash is not suitable, the block will be rejected and cannot be included in the block chain. If the hash is accepted the information is broadcast to the network and the updated block chain is sent to all peers in the network.

The challenge to solve the hash problem creates competition between users to work as fast and as accurately as possible. The peer review system means that no single user can manipulate the system, as the inclusion of data into the block chain requires a majority acceptance.

In order to hack the bitcoin block chain a miner would have to have at least a 51% majority over other miners in the peer network. The time and computing power required for this is too great for any individual miner. However as the system grows and large corporations are getting involved in the business of bitcoin mining, some have become concerned.

In some cases large large mining collectives have come close to reaching a majority, this has led to tension within the network. Situations like this have led to large groups voluntarily dissolving into smaller groups. As the number of miners increase and the number of available bitcoins decrease, bonuses will decrease and miners will depend more on transaction fees.

This will probably lead to more collective mining in the future in order for the business to remain profitable. Up until now the system has worked perfectly and is highly commended. Moving forward the bitcoin industry will have to adapt to the growth challenges facing it.

Should You Invest In Bitcoin?

Bitcoin, an open source P2P currency, has had a checkered history since its inception in October 2008. Defined as a digital currency that facilitates the transfer of funds independently of central banking systems, Bitcoin is the world’s first cryptocurrency. Unlike traditional currency, Bitcoin isn’t minted by a bank or financial institution— it’s created digitally via a mathematical formula.

Bitcoin investment over the eight years since its release as a currency and payment system, especially Bitcoin investment, has created a large amount of controversy with both the international banking system and governments worldwide.

Easy to set up and completely decentralized, the dramatic surge in the value of Bitcoin has led to success stories such as an early adopter investing just 27 USD to receive an 886,000 USD return.

bitcoin usd price

Anonymous, transparent and with negligible transaction fees, it’s easy to understand why Bitcoin has had such a large impact on the financial world, but deciding whether to invest in cryptocurrency requires an understanding of the history of Bitcoin and the legal intricacies surrounding its trade. What is bitcoin and why is so popular?

Purchasing Bitcoins has become a relatively easy process - they can be purchased like any other currency through trading agents, bought privately and bought from ATM's where this service is available. Payment for bitcoins will depend largely on who you are buying from.

Online agencies will generally accept payment via EFT (electronic funds transfer), Private sellers may sell for cash in local or even foreign currency. Currently it's not possible to buy bitcoins using a credit card or PayPal, primarily because these payment methods can be reversed after the transaction has been concluded - Bitcoin is working at resolving this.

The History Of Bitcoin

Released to a small cryptography mailing list in October 2008, Bitcoin began as and still is, open source software. While the identity of the creator of Bitcoin is unknown, the programming group responsible for unleashing the cryptocurrency on the world is known as Satoshi Nakamoto.

Early adopters began trading Bitcoin in small amounts, with the Bitcoin trade limited to niche cryptocurrency groups until it mainstream websites such as Wordpress, OkCupid, and Expedia began accepting Bitcoin as currency between 2013 and 2014.

A single Bitcoin, as of December 2016, is worth roughly 780 USD, a significant difference to the first transaction in which Bitcoins were traded for real world goods- a pizza- in 2010, at 0.0025 per coin.


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