What is Bitcoin? Why get Bitcoin? How can you MINE Bitcoin?
These are some of the questions you may have about, or heard about Bitcoin.
So firstly what is Bitcoin?
Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros or any other currency controlled by a central bank often referred to as FIAT currencies – Bitcoins are produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems. In exchange for cracking these problems the network rewards the people owning these computers with Bitcoin.
It’s the first example of a growing category of money known as cryptocurrency.
First let’s watch a brief video, What is Bitcoin?
Who created it?
A software developer called Satoshi Nakamoto proposed bitcoin, which was an electronic payment system based on mathematical proof. The idea was to produce a currency independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees.
On what is Bitcoin based?
Conventional FIAT currency was based on gold or silver in the past. Theoretically, you knew that if you handed over a dollar at the bank, you could get some gold back (although this didn’t actually work in practice). But bitcoin isn’t based on gold; it’s based on mathematics.
Around the world, people are using software programs that follow a mathematical formula to produce bitcoins. The mathematical formula is freely available, so that anyone can check it.
The software is also open source, meaning that anyone can look at it to make sure that it does what it is supposed to.
What make Bitcoin different from FIAT currencies?
It’s Decentralised – The bitcoin network isn’t controlled by one central authority. Every machine that mines bitcoin and processes transactions makes up a part of the network, and the machines work together. That means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown – or simply decide to take people’s bitcoins away from them, as the Central European Bank decided to do in Cyprus in early 2013. And if some part of the network goes offline for some reason, the money keeps on flowing.
It’s easy to setup – Conventional banks make you jump through hoops simply to open a bank account. Setting up merchant accounts for payment is another nightmarish task, beset by bureaucracy. However, you can set up a bitcoin address in seconds, no questions asked, and with no fees payable. Here is a link to a Luno software wallet that will give you R10 free Bitcoin when you open a wallet using this link [promo code ZVAR9]==> Luno Wallet Promo
It’s anonymous – Users can hold multiple bitcoin addresses, and they aren’t linked to names, addresses, or other personally identifying information. However… IT IS COMPLETELY TRANSPARENT.. every detail of every transaction that has ever happened in the network is recorded in a huge version of a general ledger, this is called the BLOCKCHAIN.
Transaction fees are minuscule – have you ever transferred money internationally from one persons account to another? The costs are huge. Bitcoin costs are fractional in comparison.
It’s fast – You can send money anywhere and it will arrive in minutes, as soon as the Bitcoin network processes the transaction.
How are Bitcoins MINED?
In traditional FIAT money systems, governments simply print more money when they need to. But in bitcoin, money isn’t printed at all – it is discovered. Computers around the world ‘mine’ for coins by competing with each other. You saw in the link above that complex mathematical problems are cracked by computers on the Bitcoin network. Each time a block of transactions is created, miners put it through a process. They take the information in the block, and apply a mathematical formula to it, turning it into something else. That something else is a far shorter, seemingly random sequence of letters and numbers known as a hash. This hash is stored along with the block, at the end of the blockchain at that point in time. This is what a typical hash looks like – “0000000000000000003ebaa690718fec40df8b6d171c930beb5926a2c7591069“
Hashes have some interesting properties. It’s easy to produce a hash from a collection of data like a bitcoin block, but it’s practically impossible to work out what the data was just by looking at the hash. And while it is very easy to produce a hash from a large amount of data, each hash is unique. If you change just one character in a bitcoin block, its hash will change completely.
Miners don’t just use the transactions in a block to generate a hash. Some other pieces of data are used too. One of these pieces of data is the hash of the last block stored in the blockchain.
Because each block’s hash is produced using the hash of the block before it, it becomes a digital version of a wax seal. It confirms that this block – and every block after it – is legitimate, because if you tampered with it, everyone would know.
If you tried to fake a transaction by changing a block that had already been stored in the blockchain, that block’s hash would change. If someone checked the block’s authenticity by running the hashing function on it, they’d find that the hash was different from the one already stored along with that block in the blockchain. The block would be instantly spotted as a fake.
Because each block’s hash is used to help produce the hash of the next block in the chain, tampering with a block would also make the subsequent block’s hash wrong too. That would continue all the way down the chain, throwing everything out of whack.
So, that’s how miners ‘seal off’ a block. They all compete with each other to do this, using software written specifically to mine blocks. Every time someone successfully creates a hash, they get a reward of 12.5 bitcoins, the blockchain is updated, and everyone on the network hears about it. That’s the incentive to keep mining, and keep the transactions working. Watch this short video on Bitcoin mining…
Can I make money out of MINING for Bitcoin?
Yes you can, but not everyone has the capability of buying a mining computer, setting up the software and integrating it into a network. Modern miners also work in pools, much like when people first discovered gold. Gold miners could work their gold mining claim by themselves, or they could get together as a syndicate with their neighboring gold miners, pool their resources and efforts and split the rewards.
So even if you bought your own mining rig you would still be an individual miner.
Pool mining companies have made it easier for people who have no IT or computer skills and know how to join in. Welcome to the modern Mining companies.
The great news is that we are still early in the Bitcoin technology adoption curve, so there is no better time than now to get involved in mining if you want a piece of the Bitcoin pie. If for instance you new in the early 1990’s that Google search engine would do so well, would you have bought some of their shares? What if you did, today you would be a lot better off financially. The picture below highlights where we are in the adoption phase of Bitcoin, so are you willing to take a little risk and invest in Blockchain technology?
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