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Home / Bitcoin Guide / Understanding Digital Currency: What Are Bitcoins?

Understanding Digital Currency: What Are Bitcoins?

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The continued advancement of technology has fundamentally changed how we live.

We are now more connected than ever and can access a wealth of information in a matter of milliseconds. This transformation is even changing the way we spend money.

Digital currency has now come to the forefront of public consciousness. While some of you might use your smartphone to pay for groceries, there are others that are taking digital currency to an exciting new territory, which might leave you asking one particular question: what are bitcoins?

In this post, we’ll ease your confusion and provide answers to the question “what are bitcoins?”

What Are Bitcoins, Anyway?

What are bitcoins? That’s the question more and more people are beginning to ask themselves. The simple answer is this: bitcoins are a form of digital currency. And from there the answer gets more complicated, as it’s also considered a type of cryptocurrency.

But back to the basics for now. Bitcoins are similar to other currencies, such as the U.S. Dollar and the Euro. You can use them to buy goods and services electronically, and you can trade and buy them via digital markets.

But bitcoins have an important characteristic that sets them far apart from other currencies. That is, it’s a decentralized currency. So what does that mean? It means that bitcoins aren’t controlled from a central location such as the Federal Reserve and other big banks. To emphasize this point, there is no single entity in control of bitcoin markets.

But bitcoin is still first and foremost a cryptocurrency. The code relies upon and utilizes cryptography as a major security feature. This also means that bitcoins are extremely difficult to counterfeit. Also, because it isn’t issued by a central authority, it is safe from government manipulation.

This decentralized nature is perceived as a benefit to some, and a threat to others. Some proponents of bitcoins even argue that it’s a way to fight against the tyranny of big banks, but more on that later.

A Brief History of Bitcoin

To adequately answer the question of what are bitcoins, we need to take a look at how they were developed.

Bitcoins were developed by a computer programmer or a team of computer programmers. The identity of the inventors, however, remains unknown. Whoever was responsible, though, did so under the name Satoshi Nakamoto.

The code was then released in 2009 as open source software, meaning anyone can make improvements to the original source code. The bitcoin system operates on a peer-to-peer network. That is, the transactions are made between two bitcoin users directly. Here is where the decentralized nature of bitcoins becomes apparent.

In the time since its release, bitcoins have been embroiled in the occasional controversy.

How It Works

Unlike other types of currencies, bitcoin transactions do not require a middleman or intermediary. Each transaction is, however, verified using the same network used to transfer them.

The transactions pass through what are called nodes, which are redistribution points within the network. Every individual transaction is then recorded in a public ledger, which is called a blockchain.

The blockchain serves as a public log of every bitcoin transaction that has taken place. Despite the public availability of this ledger, the buyers and sellers are never named. Rather, the transactions are identified with wallet IDs. Due to this, the users’ transactions remain private. It also makes tracing the transaction back to individuals more difficult.

Due to this, the users’ transactions remain private. It also makes tracing the transaction back to individuals more difficult. As a result, bitcoins have become the currency of choice for illicit online markets.

Where Bitcoins Come From

As previously mentioned, bitcoins aren’t controlled by a central authority like other world currencies. But bitcoins aren’t created in the same manner as conventional legal tender., the value is based on the values of precious metals such as gold and silver.

Central banks, for example, have the authority to print more currency. The value of these currencies is then based on the prices of precious metals such as gold and silver. But as more currency enters circulation, the value of the currency drops.

Bitcoins, alternatively, can’t be “printed” on demand. Rather, bitcoins are generated by a community that’s free to join. Individuals then use specialized computer software to solve complex mathematical equations. Once one of these equations is solved, the user is rewarded with a freshly created bitcoin. This process is called “mining.”

But the network abides by certain rules. These rules limit the total number of bitcoins that can ever be created or mined. Only 21 million bitcoins will ever be created due to these rules. Although, bitcoins may be divided into smaller parts.

Using Bitcoins

Getting a Bitcoin wallet

The decentralized nature of bitcoins makes using them quite simple, actually. Getting a checking account at a bank, for example, requires you to jump through a variety of hoops. Getting your own bitcoin wallet, though, can be done in minutes.

If you’re going to use Bitcoins, you first need Bitcoin wallet that you will use to store coins. This wallet is to be used to send and receive Bitcoins. Most popular BTC wallets include;

 

Desktop wallet

Electrum

Electrum could be the most widely used desktop wallet, because of its speed and usability. Electrum may also be used as cold storage in case you have an extra computer that can be used offline. Additonaly, Electrum provides other options like connecting with Tor, multisiganture wallets, integration with hardware wallets, even more.

 

Hardware Wallet

Ledger Nano

The Ledger Nano is a smartcard-based hardware wallet. Private keys are created and signed offline in the smartcard’s secure environment. The Nano is set up with the Ledger Chrome Application. A randomly 24-word seed is created at setup and backed offline by writing it down on a piece of paper. In the case of theft, damage or loss, the complete wallet can be recreated with that seed. A user picked PIN code is also issued to the unit to protect against physical theft or hacking.

 

Online wallet

CoinBase

CoinBase is an all-in-one solution for Bitcoin. Services available consist of several Bitcoin solutions, from exchange to Bitcoin e-wallet.

 

But if you’re not a bitcoin miner, how do you get them? You simply buy them. Marketplaces called “bitcoin exchanges” allows people to buy, sell, and exchange different currencies for bitcoins. Bitcoins are transferred almost immediately at little to no cost to the users, unlike other money transfers. From there you can receive and send bitcoins as your heart desires.

Is It Here to Stay?

The fate of bitcoin has yet to be determined. However, it should be noted that bitcoin is not the only cryptocurrency available. This points to a bright future for decentralized currencies.

But it’s also a source of great concern for governments. Cryptocurrencies are largely unregulated. Because governments don’t have control over this currency, they are unable to tax it or influence its value.

Opinions on the longterm survival of bitcoin and other cryptocurrency vary. Some people have already predicted its failure. Meanwhile, others are asserting that it isn’t just a passing fad. Only time will tell, though.

Converting Your Currency

If you’re still asking, “what are bitcoins,” perhaps cryptocurrency isn’t for you. If you’re still confused, though, you wouldn’t be the first. To learn more about bitcoins and how to use them, check out our Bitcoin Guide.

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