Career and Finance Technology

Bitcoins: How do Bitcoins Work And It Benefits

Written by Aaron

What Are Bitcoins?

To know bitcoins, one needs the idea of cryptocurrencies.

They are merely virtual money or a web-based transaction system. However, cryptocurrencies are mainly a pioneering Internet technology. Its use as a means of exchange is only one possible application. Cryptocurrencies are the first financial system invention developed outside of financial institutions without the slightest contribution on their part.

Bitcoins is defined as an electronic currency. They are a form of digital public money that is created by painstaking mathematical computations and policed by millions of computer users called ‘miners’.

In essence, bitcoins are electricity converted into long strings of code that have money value. It is the world’s first cryptocurrency or digital currency

A bitcoin, at its core, is a very simple data ledger file called a ‘blockchain’. A blockchain’s file size is quite small, similar to the size of a long text message on your tablet or smart phone.

There are three parts in every bitcoin blockchain, of which two  are very simple: holds the history of who has bought and sold it (the ledger) and  identify address (of about 27 to 34 characters).

The complex part of the bitcoin is its third part: the private key header log. This header captures a sophistication digital signature to confirm each and every transaction for that particular bitcoin file.

Each digital signature is unique to each individual user and his/her personal bitcoin wallet.

These signature keys are the security system of bitcoins: Every single trade of bitcoin blockchains is tracked and tagged and publicly disclosed, with each participant’s digital signature attached to the bitcoin blockchain as a ‘confirmation’. These digital signatures, when given several seconds to confirm their transactions across the network, prevent transactions from being duplicated and people from forging bitcoins.

The number of bitcoins is fix at 21 million, which limits inflation and deflation. Every bitcoin is into subdivision of  100 million units known as satoshi. Currently (as of November 2016), a bitcoin trades for approximately US$ 750. In the last four years, its exchange rate rose from ca. US$ 100.

Who is the founder of bitcoin?

In December 2015, the US-based Wired and Gizmondo portals posted suggestions that the creator of bitcoin may be the Australian IT entrepreneur Craig Steven Wright, who himself acknowledged he had invented bitcoin under the pseudonym of Satoshi Nakamoto. The bitcoin community has refused to believe such reports. Its members are convinced that the pseudonym disguises a team of scientists, mathematicians and cryptographers. The one thing that I am confident about is that when Satoshi Nakamoto announced in October 2008 his idea of what he then called a new and entirely-peer-to-peer electronic cashless system that would eliminate third-party fiduciaries, he had no inkling he was starting a revolution that would wipe out the financial system as we know it today and transform its fundamental operating principles.

How Bitcoins Work

Bitcoins behave like physical gold coins once you own some: they possess value and trade just as if they were nuggets of gold in your purse or pocket. You can use your bitcoins to purchase goods and services online, or for  their value  to increase, you can tuck them away some years.

Note:  The whole concept of your bitcoins wallet becomes anonymous. The bitcoin system does not record the names of the individuals who owns the wallet. Every bitcoin records the digital address of every bitcoin wallet it touches. In practical terms, this means that there is a digital confirmation of every bitcoin transaction but its completely anonymous at the same time.

Your bitcoins are stored on a computer device of your choice, but the history of each bitcoin you own or spend is publicly stored on the bitcoin network, and every user will be able to see every bitcoin’s history as said above.

While people cannot easily see your personal identity, people can see the history of your bitcoin wallet. This is a good thing, as a public history adds transparency and security, helps deter people from using bitcoins for dubitable or illegal purposes.

You can see bitcoin transactions at These are public ledgers of all the bitcoin wallets on the planet.  Remember there’s no  attachment of names; the wallets themselves are completely anonymous.

The trade of Bitcoins are from one personal ‘wallet’ to another. Its a peer-to-peer transaction.

For all intents, bitcoins are forgery-resistant. It is so computationally-intensive to create a bitcoin, no one can manipulate the system because it isn’t financially worth it for counterfeiters to do so.

 Production Facts

 On June 2011, with one touch of a mouse, a hacker managed to transfer 25,000 credits of online currency – then worth almost $500,000 dollars – to his own account. The transfer was visible on a public register; the original owner has publicized his plight online, but to no avail – the money was gone.

From 2011-2013, bitcoins was made famous by criminal traders by buying them in batches of millions of dollars with the purpose of easy movement of money outside the eyes of the law enforcement. Subsequently, the value of bitcoins skyrocketed.

This hack, which happened in June 2011, was the first major online heist for Bitcoins, one of the world’s newest leading cyrptocurrencies, and the subsequent panic left many casual users reeling.

Days later, another hack occurred: an attack on the currency’s biggest online exchange, involving more than 400,000 Bitcoins – worth almost $9m (£5.5m). The attempt of selling the coins was a sale so huge that it plunged the value of each coin from more than $17 to $0.01

With a strong computer, anyone can  ‘mint’ bitcoins in the general public. Bitcoins are made through mining: a very interesting self-limiting system. It is self-limiting because only 21 million total bitcoins will ever exist, with almost 11 million of those Bitcoins already in current circulation as of this year(2017)

Bitcoin mining involves commanding your home computer to work around the clock to solve computationally-intensive math problems (‘proof-of-work’ problems). Each bitcoin math problem has a set of possible 64-digit solutions. Therefore, you might solve One bitcoin problem if your desktop computer works nonstop within two to three days.

You can earn 50 cents to 75 cents USD per day, minus your electricity costs with a single personal computer mining bitcoins. Whiles, for a very large-scale miner who runs 36 powerful computers simultaneously, you can earn up to $500 USD per day, after costs.

You will spend more in electricity if you are a small-scale miner with a single consumer-grade computer. Bitcoin mining can only be  profitable if you run multiple computers, or you join a group of miners to combine your hardware power.  The very requirement of the  prohibitive hardware is one of the biggest security measures that dissuade people from trying to manipulate the Bitcoin system.

Bitcoin Values and Regulations

The value of a single bitcoin varies daily; you can check places like Coindesk to see today’s value. There are more than two billion dollars worth of bitcoins in existence. Bitcoins has a limit(21 billion) which when reached, its creation will seize which will be sometime around 2040. More than half of 21 billion bitcoins already exist as of 2017

Bitcoin currency is completely not subjected to rules or discipline and completely decentralized. There is no national bank or national mint, and there is no depositor insurance coverage. The currency itself is self-contain and furthermore, there is no precious metal behind the bitcoins; the value of each bitcoin resides within each bitcoin itself.

The stewards of Bitcoins are ‘miners’, the massive network of custodians who contribute their personal computers to the Bitcoin network. The miners act as a swarm of ledger keepers and auditors for Bitcoin transactions.

Each week they contribute to the network, miners get a payment of earning bitcoins for their accounting work.

 Fees to Use Bitcoins (Banking or other fees)

There are no ongoing banking fees with bitcoin and other cryptocurrency. Since it involves no banks,there is but a very small fees in using bitcoins. You will pay small fees to three groups of bitcoin services: the nodes (servers) who support the network of miners; the online exchanges that convert your bitcoins into dollars; and the mining pools you join.

The owners of some server nodes will charge one-time transaction or small fees of a few cents every time you send money across their nodes, and online exchanges will similarly charge when you cash your bitcoins in for dollars . Additionally, most mining pools will either ask for a small donation from the people who join their pools or charge a small one percent support fee.

While there are nominal costs to use Bitcoin, the mining pool donations and the transaction fees are much cheaper than conventional banking or wire transfer fees in the end.

Bitcoin Protection

When one takes a reasonable precautions, one will be safe from hackers stealing his/her personal cache.

You can store your bitcoin wallet on a cloud service (online) or on a hard drive or USB stick (offline). The offline method is more hacker-resistant and absolutely recommended for anyone who owns more than 1 or 2 bitcoins.

A mismanagement and unwillingness  to invest any money in security measures can have you pay the price as  Mt.Gox, for all intents and purposes, had a large bank with no security guards,they paid the price.

There is an important .dat file that is updated every time you receive or send bitcoins. Every time a bitcoin transaction takes place, make sure you copy and store that  .dat file as a duplicate backup while the original still exist.


ill-Usage of Bitcoins

The abuse of bitcoins currency is currently in three ways;

1)  Dishonesty :

The best way of achieving Bitcoin mining is through joining a group of thousands of other miners (pooling). Bitcoin mining pool organizers can dishonestly take more bitcoin mining shares for themselves instead of few. Each organizer gets the privilege of sharing the bitcoins discovered in a group as he pleases.

2) Human mismanagement :

The people running unregulated online exchanges that trade cash for bitcoins can be dishonest or incompetent. Bitcoins have no insurance coverage for users when mining organizers or miners are being dishonest and incompetence. You can loose your money and there is no insurance to recover as banks do. Bitcoin exchanges have no insurance coverage for users.

3)Technical weakness – time delay in confirmation:

Since bitcoins travel peer-to-peer, it takes several seconds for the confirmation of a transaction across the P2P swarm of computers. During these few seconds, a dishonest person who employs fast clicking can submit a second payment of the same bitcoins to a different recipient.

While the system will eventually catch the double-spending and negate the dishonest second transaction, if the second recipient transfers goods to the dishonest buyer before they receive confirmation, then the second recipient is sure to lose both the payment and the goods.

 Reasons Why Bitcoins Are Such a Big Deal

There is a lot of controversy around bitcoins. These are the top 4 reasons why:

1)Bitcoin transactions are irreversible.

Unlike a credit card charge, bank draft, personal checks, or wire transfer, there is no insurance protection of your bitcoin wallet. If you lose your wallet’s hard drive data or even your wallet password, then your wallet’s contents will be no more. Meaning you will loose them forever.

2) Bitcoins are changing how we store and spend our personal wealth.

For all these years the central mints and various banks have been controlling our money; monitoring our every transaction; storing our  money; printing our virtual money; and moving them while charging us for their middleman services.  The design of Bitcoins is to put the control of personal wealth back into the hands of the individual. Instead of paper or virtual bank balances that promise to have value, Bitcoins are actual packages of complex data that have value in themselves.

3) Bitcoins completely bypass banks.

Bitcoins is an individual transaction which transfers via a peer-to-peer network with no middleman bank to take a slice.

Not as banks, there’s no seizing or auditions by banks and law enforcement concerning your wallet. No one but the owner of the bitcoin wallet decides how they will manage their wealth. Bitcoin wallets cannot have spending and withdrawal limits imposed on them.

This is really threatening to banks, as you might well know by now.

4) No central Bank creates Bitcoins and no regulations by any government. 

Accordingly, there are no banks logging your money movement, and government tax agencies and police cannot track your money. This is bound to change eventually, as unregulated money is a real threat to government control, taxation, and policing.

Indeed, bitcoins have become a tool for contraband trade and money laundering, precisely because of the lack of government oversight. The value of bitcoins skyrocketed in the past because wealthy criminals were purchasing bitcoins in large volumes.