Investment Banking

Bitcoin -in layman terms

In this blog we will understand Bitcoin in plain English. After reading this article you will understand basics of following jargons also:

  1. Ledger
  2. Block and Blockchain
  3. Cryptography & Crypto Currency
  4. ECDSA
  5. Mining
  6. Public and Private Key
  7. Wallet (software/hardware/paper)

 

For an end user of Bitcoin, it is like medium of exchange. Bitcoin is like a currency which few individuals and organizations accept and recognize as mode of exchange. For Bitcoin to work as a mode of exchange there has to be certain number of Bitcoins flowing or available in economy system and there has to recognition of Bitcoin as mode of exchange like gold or Dollar. Since there is no government or bank who recognize Bitcoin as currency yet and of course they do not generate it, how does Bitcoin appear? It has to be available like gold or Dollar in some form. Here it gets interesting. At first, an unknown person or a group of individuals (named herself/himself/themselves as Satoshi Nakamoto) created a few Bitcoins and offered Bitcoin in exchange of some services or product. At that time in 2008-2009 there was no value of Bitcoin because no one recognized it as mode of exchange. It was like if you give me pizza, I’ll bless you with some numbers written on a piece of paper. I’ll call those number as Bitcoins and tell you that someday it will be worth Dollars. Satoshi Nakamoto wrote a code (program) with logic that when any product/ service is exchanged against Bitcoin then some Bitcoin (nothing but a few more numbers) will be generated by code and will be given to the person who verified the transaction first and added it to the online ledger. ‘Ledger’ means book of records of all old transactions. This person who added transaction to the ledger is called ‘Miner’. Transaction/s that was added at the same time is called ‘Block’. The distributed-online-public ledger is called ‘Block Chain’. User who holds Bitcoin (those numbers) essentially holds public key (like email id) and private key (like password). These public and private keys are necessary to do the transaction. In other words, a Bitcoin (the number) is an address which is a 160-bit hash of the public portion of a public/private ECDSA keypair. Using public-key cryptography, you can “sign” data with your private key and anyone who knows your public key can verify that the signature is valid. Elliptic Curve Digital Signature Algorithm or ‘ECDSA’ is a cryptographic algorithm used by Bitcoin to ensure that funds can only be spent by their rightful owners. Place where owner holds Bitcoin is called ‘Wallet’. Bitcoin wallet can be a simple piece of paper where owner can write down his public and private key or wallet can online like your net banking account with someone.

 

Coming back to our story, this became a popular game like stuff. Anyone who holds Bitcoin in their account offer Bitcoin against service/product. Once Bitcoin is accepted by the other party (who is offering service/product), then developers (participants of game) compete to confirm transaction and add it to ledger. Whoever does it first earn new points called Bitcoins. So, this is how essentially new Bitcoins are generated and appears in economy system. All these gamers who can confirm transaction and add to ledger get free Bitcoin in their account. Hence Miners (gamers) desperately want Bitcoin to be more and more popular so that they can buy more services/products in less Bitcoins. Even if no one accept Bitcoin these gamers (called miners) will continue playing by creating transaction like it was done first time as the task of adding transaction into ledger is fun and challenging especially for geek coders. This ledger is public so that anyone can play. However now only few are able to afford the cost of processor and skills required to play the game.

 

You can buy Bitcoin against a service/product (like Dollars) if you believe that Bitcoin value is worth the amount you are asked to pay. Those gamers and traders of Bitcoin are desperate. I would strongly recommend you to stay away unless you know nitty-gritty of the Bitcoin. Even if you come to know a lot about if do not invest all your money in it or any other Bitcoin like crypto currency. Because all sorts of sophisticated criminals have been trying to get hold of your Bitcoin. There are good reasons for this. Bitcoin is not regulated. Once you lose Bitcoin by hacking or any other way you have no place to go to complain. Bitcoin is mostly anonymous. You won’t come to know who got your Bitcoins. Those gamers say that people don’t understand internet but still use it. I say people who don’t understand internet and use it for economic activity, are prone to hackers and lose their hard-earned money in no time. First gain knowledge, only then you try it.

 

If you like this article, let me know your comments.

 

4 thoughts on “Bitcoin -in layman terms

  1. Hello ,

    I saw your tweets and thought I will check your website. Have to say it looks very good!
    I’m also interested in this topic and have recently started my journey as young entrepreneur.
    http://janzac.com/
    (Recently I have added a new page about FutureNet and the way how users can make money on this social networking portal.)

    I have subscribed to your newsletter. 🙂

    Hope to hear from you soon.

    Regards
    Jan Zac

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