Bitcoin is the new currency that has taken the web by storm. The virtual cryptocurrency is a way of transferring money across the web and in today’s episode, Stevan will explain a little more about how the system works and what lies in the future for Bitcoin.
Hi and welcome to another episode of MyCurrencyTransferTV. There’s been a lot of discussion about Bitcoin. What it is, what it does, how it works, whether we should jump on board right now or are we missing some good new thing. I’m hopefully going to answer some of those questions and discuss a little bit about how it works and what it means for us.
What is Bitcoin?
So, Bitcoin. It’s essentially a virtual currency. But in essence a digital file that quite simply keeps the account and the money a bit like a ledger. So as you can see here, people all over the world have a copy of this ledger. So maybe you’re thinking why do people keep a copy of this ledger all over the world. Well this is one fundamental difference between Bitcoin and the traditional Banking System. Bitcoin, allows every single person on the network to keep a copy of every single transaction that has ever happened on Bitcoin historically, right from day one. Banks on the other hand keep a transaction log of funds that have gone in to the bank and out of the bank, not of all the other banks ever. So, who keeps a copy of these ledgers? Well it’s every single node, or otherwise known as a computer on the Bitcoin network. So if you were to get a Bitcoin address and install Bitcoin on your computer, your computer will download every single transaction that has ever happened. This is part of the way that Bitcoin works and it ensures that nothing outward is happening, so that every body knows what every body else has done. But it’s a bit different to knowing who did it; we’ll talk a little bit about anonymity in a second.
So what do these ledgers mean? What do they look like?
Well, it’s actually called a block chain within the Bitcoin System. A blockchain quite simply contains information about who sends how much to whom. It would be easy if it were like this where it said Jack sent 5 Bitcoins to Suzi but in reality, what it is, is a ‘from’ address and a ‘to’ address. These addresses are a little bit weird and unmemorable. They are just letters and number combinations; it’s a bit like an e-mail address, just really ugly. So all of the Bitcoin blockchains keep a copy of all the transactions that ever happened saying this address sent that amount to that address and every body has a copy of this.
Now that we know how it works, where is the trust, how can we know somebody actually sent that money and they didn’t just keep it to themselves. That’s where the security of Bitcoin comes in. Bitcoin is held down by mathematical algorithms, it doesn’t rely on trust whatsoever. It’s actually built to work against the notion of trust. The way that it combats that is that it mathematically checks using cryptography whether the transaction is labelled to have happened has actually happened and it checks this against everybody else on the network. So there are checks in place to do this and Bitcoin is essentially held up by a network of these mathematical algorithms.
So now that we know how Bitcoin works, you must be wondering who creates all these ledgers or these blockchains. How do they work? How do you even get Bitcoins?
So there are two ways. One way to get Bitcoins is to buy them, so you get your Pounds, Euros or Dollars in exchange for a certain number of Bitcoins. You can do this on online exchanges such as Mt. Gox and a host of other websites. It is the same websites by the way that you can convert your Bitcoins back in to real currencies such as Pounds, Euros, Dollars etc. So that’s how you would link Bitcoin with the real world currency. But put that to one side, that’s one way that you can obtain Bitcoins, is you can buy them. Another way to obtain Bitcoins is to mine for them, now that is a semi-free process; you’re not exchanging your money for that, what you are doing is paying in computational power in exchange for Bitcoins. I’ll explain what that means.
You can mine for Bitcoins using your computer so if you leave your computer running with a certain application installed, it will churn out a magical computation, which will ultimately, discover a new blockchain. This blockchain benefits the system, and in return for discovering this blockchain or assisting in the discovery of the block chain, you are rewarded with a certain number of Bitcoins. I should say that this is quite a competitive field now, where there are people getting together in groups and organisations who are buying very complicated heavy-duty servers hosting them in big data centres with the sole purpose of discovering blockchains.
So what do you do with these? Do people let me pay for things; can I buy a pizza with them? What can I do with these things?
The answer is yes, you can. There are eBay likes websites that accept Bitcoins, there are even pubs, coffee shops that accept Bitcoins all around the world and online you can pretty much find any supplier selling all sorts of different things pretty much anything that you’re after, and if not yet, increasingly so, who will also offer Bitcoins as payment.
So how far can you take this? Can you buy a house with it?
Not quite yet, the main reason is down to tax and stamp duty in all countries. Governments haven’t got round to regulating Bitcoins just yet. If you were to send 5 Bitcoins from your address to somebody else’s address, there’s no way to get that back. So if you were to buy a pizza that ultimately was never delivered, you’re out of luck. But if you are travelling, if you are emigrating from one country to another you can of course have your Bitcoins, keep them and when you move to another country, you can convert them back in to whatever currency is required at your destination. For example from the UK you have your Bitcoins, once you immigrate to lets says Australia, you can use a system like Mt. Gox to export them or rather exchange them to Australian Dollars. This will be cheaper than converting Pounds directly to Australian Dollars in terms of transfer ease and the exchange rates.
Will Bitcoin work? Or is this just a fad?
Nobody knows. But one thing it has proven is that a virtual digital currency can work and that’s critical because predecessors have not worked and to date it has been very difficult to prove that these things are worthy of our attention, time and money but Bitcoin has proven that it can work and that’s very important.
So even if Bitcoin itself doesn’t work, one things for sure, it has laid the ground work for all future virtual currency systems to build upon and that’s why every body is excited about it. It needs something that much closer to reality not relying on your traditional currencies. There’s a whole world of things to explore here and we’ll link up to some of the resources we’ve mentioned in this video but for now I hope that answers most of your questions.
Thank you for watching, goodbye.
Written by Stevan Litobac on Google+