what is Bitcoin? how works? Transactions, Advantages and Disadvantages ~ Best We Want

What is Bitcoin?

Bitcoin is the first Cryptocurrency as well as the first blockchain implementation in the world.

Bitcoin is a digital currency which operates free of any central control or the oversight of banks or governments. It relies on peer-to-peer software and cryptography.The cryptography behind bitcoin is based on the SHA-256 algorithm designed by the US National Security Agency.

How Bitcoin Working

The first thing we have to do is create an Account in Bitcoin blockchain. Next create a digital wallet. There is a number of wallet service providers like coin-base and Bit-core. While creating an account the user has to provide a ‘Key’ (similar to a password).

Every transaction is publicly broadcast to the network and shared from node to node. Every ten minutes or so these transactions are collected together by miners into a group called a block and added permanently to the blockchain. This is the definitive account book of bitcoin.

Using this key the wallet will generate a valid bitcoin Private key- Public Key pair. The public key will be visible to all and it is the visible account ID of the user. On the other hand, the user keeps the private key by himself, it is the access key to his account. If a person loses his private key he loses access to his account and his money.

Bitcoin Transactions

Sending bitcoin from one account to another is called as a transaction. It is usually done through wallets. The wallet app will provide an interface where we can input the account Id of the recipient and the amount we wish to transfer.

Once we have made the transaction, the miners will verify the transaction and add to the blockchain ledger if it is a legitimate one. In Bitcoin, the transactions are cost-free. Usually, a transaction validation time is about 10 minutes in bitcoin, but if we give a small transaction fee we can speed up the process.

Bitcoin Mining

When a new bitcoin transaction happens in the network that is broadcast on the network. The miners listen to this broadcasting and engage in transaction verification. Once the transactions are verified they are added to a block.

Value of Bitcoin

The value of the bitcoin basically depends on the demand and supply. However, there are many other factors including public perceptions, mining difficulty level, energy consumption for mining process etc. that are taken into consideration while calculating the actual exchange rate. So that there will be some slight variations in exchange rate across the different market.

Following is the simplest model to determine the value of bitcoin.

T : Total bitcoin transaction/second

D : Duration that a BTC needed by a transaction

S : Supply of the bitcoin

P : Price of the bitcoin

We have

S/D=Bitcoins available per Second

T/P= Bitcoins needed per Second

According to demand-supply rule, when the supply of the bitcoin increases the demand decrease consequently the price will also decrease. And when the demand increases the supply of bitcoin will also decrease, consequently the price of the bitcoin will also increase.

At an equilibrium state, where the supply S over D, is equal to the demand T over P. We can deduce the price P as

S/( D)=T/P

Equilibrium state:-

P=TD/S

That is at equilibrium, the price should be equal to T times D divided by S.

Advantages of Bitcoins

1) Transaction Speed

Cryptocurrencies offer very fast transaction which is far more superior than the Present banking transaction speed. Bitcoin takes a maximum of 10 minutes for validating a transaction and it is about 10 seconds in Ethereum.

2) Anonymity

Cryptocurrency transactions are fully anonymous and it is not possible to identify who had done this transaction or to whom this transaction is made. The

participants will be using only the network address of the sender and receiver.

3) No restriction on payments

There is no restriction on transactions. The user can send the currency at anytime from anywhere to everywhere. That means no time boundaries like bank holidays.

4) Less /No transaction fees

The cryptocurrency transactions are normally free. Or the fee is much less than present financial transaction charges. In bitcoin, anybody can do transactions without paying any transaction fees.

5) Immutable transactions

Cryptocurrencies are one of the most secure currency systems available today. It has the ‘immutable’ property; i.e. If one transaction had occurred in the blockchain based cryptocurrency, it is irreversible. So the chances of fraudulent transactions are nearly impossible.

6) Government can’t De-monetize

Most of the cryptocurrencies work as a decentralized system and its exchange rate is fixed dynamically according to the demand-supply factors. No government regulation or anything can’t stop such independent cryptocurrencies. The only thing that a government can do is restrict the conversion of it to normal currency. However, they can’t stop the transactions in cryptocurrencies.

7) Secure Payment information

Cryptocurrency transactions don’t use any identity of the users. They will only use the wallet address of the sender and receiver, all other information is securely hashed and no one can retrieve it back.

8) No Inflation

Most of the cryptocurrencies have a fixed number of currencies in their exchequer. In case of bitcoin, it is 21 million. Once the entire thing has mined there won’t be any more new bitcoins. So there is no chance for inflation.

Disadvantages of Bitcoins

1) Less Acceptance

Even though the demand for ‘cryptocurrency’ is steadily increasing, the point is that many governments have not given any official approval for ‘cryptocurrency’ transaction. And its usage is now limited some specific domains only.

2) Inconsistent rate

It can consider either as an advantage or disadvantage. Although there is a strict demand supply rule to define the exchange rate of cryptocurrencies, present market trends indicate an uncommon surge in the exchange rate of cryptocur¬rencies, especially that of Bitcoin.

3) Government Ban

As we said government can’t control cryptocurrencies, but they can ban it and illegalize its transaction.

4) Deflation can happen

Cryptocurrencies are generally limited in number and its exchange rate is basically depended upon the supply and demand.

Since most of the cryptocurrencies have only a fixed number of currencies, the possibilities of deflation are greater than any other economic system. In case of bitcoin, if someone holds the bitcoin for a long time, then the supply will reduce and still the demand will increase and it will create deflation.

5) Key recovery is impossible

Since most of the cryptocurrencies don’t have a central authority, every individual is responsible for keeping their account safe. If anyone loses the wallet key, no one can help them get it back.

6) Supports Money Laundering/Black Market

The anonymity of the cryptocurrency makes it attractive to the black market and money launderers. Since the identity is not revealed anywhere misuses are reported several times.

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what is Bitcoin? how works? Transactions, Advantages and Disadvantages