BITCOIN: The Virtual Currency

Bitcoin is both an online payment system and a virtual currency, which I believe has the potential to revolutionise financial networks worldwide. However the functions and details of this technology still portray an unclear picture among the masses. Let us try to understand it.

Bitcoin is a digital currency that enables payment in a decentralized P-TO-P network i.e. peer to peer network, no control of any central authority and based on the approval and consensus of its users. It is basically a network on which digital tokens can be stored or moved around. The price setting of a bitcoin takes place similar to the way a stock,s price is set in the stock market. Each unit of virtual currency is nothing more than an entry on a digital ledger similar to bank’s digital ledger, with a slight difference that bitcoin ledger is maintained by any of its users.

Transaction and Generation:

A user generates a request to transfer a bitcoin value from their account to another using a cell device or Computers. The request then floats on the bitcoin network until users in the network called Miners pick it up for processing. Computers on the network take part in a sort of computational race to win these new coins,i.e. the process called Mining  or Bitcoin Mining. This  way new coins will be generated until there are 21 million in the world, which might take first half of the next century to happen , estimated as of now. During the mining process, transactions are packed into data blocks and sare randomly assigned with a header.

Miners compete to match the block headers with an arbitrary number used only once like an OTP, to get a small alphanumeric code called Hash,which must have a value below a certain difficulty target. Each Hash accepted by the bitcoin network is rewarded with bitcoins, which might exponentially decrease as more Miners join the network.The Hash values are then added to the next block’s header, creating a block-chain which serves as the public ledger of all transactions ever made in the bitcoin network.

Anyone with a bitcoin address can send and receive bitcoins from anyone else having a bitcoin address. Its free to create a bitcoin address ,it has a private key and a password. A huge number of companies and merchants now provide with a bitcoin address to send money for completing a transaction.

The ability of a bitcoin  to be sent without revealing identity of both the parties, the instantaneous nature of transaction to any place in the world, makes it a preferred channel for criminal activity. As a result the online drug markets and merchants have been active on the bitcoin network , defaming it. Still the bitcoin network can be the future financial network. As proven it can be used by immigrants to send money to family members overseas ,not having bank accounts or government ID cards. It can also be used for very small payments online, which are generally not possible in the existing online banking or financial network.

Thus, if regulated efficiently and legally  the bitcoin network can be used for cheaper and faster trade and transactions in the future.