BitCoin creation in the year 2009 meant a “before” and “after” in the world of payment systems. We could define BitCoin as digital money or virtual money supported by a payment network at global level.
BitCoin is not the first digital money but main different is previous ones had an enterprise or organization behind strongly controlling their use. BitCoin is designed in the way nobody can control value, geographic area or usage. Even in the case BitCoin Foundation disappear and it is not existing any more BitCoin would continue working.
In this post we would try to understand the keys for understanding BitCoin network and its functionality.
The first concept to understand is BitCoin is not a classical currency. There is no counter with the number of BitCoins we have. Functionality is more close to real state market. In the network there is no accounts like banks but transactions registered in a registry. Registry check transactions are right and register them.
When user A makes a BitCoin payment to user B the network check user A has enough BitCoins for this payments checking previous transactions. Once this is checked the network register transaction associated to this payment and user A can not use these BitCoins any more. User B have now these BitCoins because there is a transaction in the network confirming it
But, Who is managing the network? Who manage this registry? This registry is not unique but there are thousands around the world. We could download the software BitCoin Core in Bitcoin.org web site and being part of the network. This software synchronize with the network (could take several days) downloading all transactions from year 2009. From this moment all past and future transactions will be in our computer and our computer will participate in transaction checking.
But, Why I have to download this program? Do I really need it to use BitCoin? This program is not really needed but BitCoin network reward with new BitCoins to all systems participating in network management. Software and methodology is public and any one could design a more efficient and powerful software.
In fact the network not only check transactions but other network elements are working properly and there is no network element with a fake software stealing BitCoins. BitCoin methodology is every one is controlling every one.
Partipating in network management is called “mining” and the activity “BitCoin mining“. Nowadays there are such a level of transactions needing really powerful computers and even specific hardware to receive a real benefit. In order to avoid inflaction these new BitCoins are distributed progresively and, every time, mining is less rewarded with the target of not having more than 21 millions BitCoins in the market.
“Mining” is not the only source of profit for “miners”. They use to be exchange agencies as well changing from BitCoin to more real currencies. The way of working and comissions are close similar to normal exchange agencies. These agencies fix dinamically the BitCoin price in real currencies in the same way the price of real currencies are fixed.
In BitCoin.org web pages we could get a wide list of exchange agencies but the biggest ones are the following:
BitCoin network has no control at all but exchange agencies should follow local legal rules and laws. Coinbase is not the biggest one but is the one recognized as more reliable. In the opposite Coinbase will request us more information to work with. Our recomendation is to select one in the list published in BitCoin.org web pages and look for comments in internet about reliability.
Once we have our BitCoins it is not necessary to maintain them in the exchange agency used. We could move to our “wallet”. A wallet program will stored only our transactions. When buying BitCoins exchange agency store them in a wallet managed by this agency but we could send these BitCoins to a wallet program in our computer or in our mobile. Only point to consider is, in case of problems, exchange agency won’t be responsible of BitCoins in our wallet.
Sumarizing we could have our BitCoins in a exchange agency wallet or in our own wallet in the same way we could have our money in a bank or in our pocket. Anyway, as we have said, BitCoin is not money but transactions. Printing our transactions information allow us to recover them in case of hardware failure: all transactions are in BitCoin network.
In other way a virus or malware could get the information about our BitCoins and use it to steal them. It is important to know any BitCoin transaction can not be undone. If somebody use our computer to send our BitCoins to other user there is no place to claim. If our wallet is in a exchange agency we could claim to this agency but there is a case of massive wallet stealing in Mt. Gox agency and this agency had to close.
Because of this point payment platforms like PayPal or credit cards like VISA or American Express don’t want to work with BitCoin. In case of problems there is no enterprise or organization to claim. BitCoin Foundation is only responsible of software evolution and it is not responsible of any problem with any transaction.
And, even considering all these risks, Is BitCoin really succesfully? 7 years are not too much to assure this success but, considering number of transactions evolution, it appears yes.
It appears we will have BitCoin for a long time even considering some doubts about its future have no answer currently:
-Number of transactions growth is exponential and it could be possible only few number of network elements are capable to follow this growth. Every network element should be capable to manage all network transactions.
-Maximum number of BitCoins (21 millions) is a designer decision and management effort of “mining” is every time less rewarded. The limit will be reached in year 2140. After this year there will be no more new BitCoins and mining won’t be rewarded in any way.
As a conclusion BitCoin is more close to an investment than a currency even considering we could use BitCoin as money. It is recommended to be well informed before using BitCoin or use an agency we are confidence on to manage our BitCoins.
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