Once Again on Bitcoin
One major feature of Bitcoin network is its decentralized architecture, which means it is a completely open financial network without the needs for authoritative banking system. Unlike conventional system where physical monetary unit is used for transactions, the Bitcoin network conducts transaction using its own currency also called Bitcoin. While Bitcoin is not the only cryptocurrency in circulation right now, it is the first to introduce an open network for the world.
Many (if not most) people think of Bitcoin as online transaction tool, in the same way as PayPal or Visa is, but that would be incorrect. Online transaction is simply another method to conduct money transfer between one account and another via Internet. Instead of using the traditional bank wire transfers, customers utilizes Internet connection to complete the money transfer. Online transaction still uses conventional currencies such as the U.S. dollars. There are two major differences:
- Online transaction still involves bank, while Bitcoin network is P2P
- Online transaction uses conventional currencies, while Bitcoin network uses Bitcoin.
To be able to use financial service in U.S. (or probably all other countries) banking system, you need to register or basically create partnership with an existing bank; it means you must comply with a lot of complex rules and variety of restrictions. Since Bitcoin network runs on P2P basis (direct transaction without going through traditional banking system) the restrictions are nonexistent. Nobody needs anybody’s permission to utilize Bitcoin’s financial services.
With the absence of central bank in the network, there is no authoritative institution that has the rights to create new Bitcoins. The system, however, has an alternative mechanism to create new currency and introduce them into circulation. As a matter of fact, the method is quite simple yet effective as follows:
|Hundreds (if not thousands to millions) of computers connected to the Internet work together to process every Bitcoin transaction. Every computer that helps in transaction-clearing process is called “miner”, and therefore the procedure is called “mining”. Everyone can be a miner as it requires essentially two things: specialized hardware and open-source software (free to download). A miner who verifies Bitcoin transaction wins prize. Between 2009 and 2012, the reward for a single successful verification was 50 BTC, but it gradually declines by half every 4 years. By late 2016, the prize falls to about 12.5 BTC. This reward is a new currency and given away in every 10 minute. As of November 2016, there are nearly 16 million bitcoins in circulation. Due to the gradual reduction of reward, the total number of Bitcoin in circulation will not exceed 21 million eventually.
The rewards act as incentives for people to join the Bitcoin’s transaction-clearing processes and help to make the network remain decentralized. As more people join the network, either by mining or using Bitcoin for transaction, the currency should become a new mainstream financial service; it seems that Bitcoin is on the right track to achieve that goal.
Deflation is Irrelevant
Bitcoin is just like another currency that we can use to purchase clothes, a crate of soda, chocolate bars, wine, and anything else money can buy. With that being said, Bitcoin is not a unit of account, something based on which the value of assets are accounted and compared – one of the main functions of money. In the U.S., the unit of account is U.S. dollar. Deflation is associated with a major economic problem, but it applies only to unit of account.
In the United States, nearly all things including but not limited to mortgage payments, salaries, rents, and debt are priced in U.S. dollars. When deflation occurs, a lot of businesses will not be able to make profits due to deflated price (as this is the almost unavoidable side effects of deflation) and therefore employers will have difficulties making payrolls. Mortgage as a secured debt will be affected as well, because homeowner has to make non-deflated payment even when the potential value of the house has become much lower.
Bitcoin is not used as unit of account, and this makes the cryptocurrency safe from potential economic problems, unlike the U.S. dollars. There are some companies or organizations that pay their employees in Bitcoins, but the salaries are still set on dollars before converted to the corresponding number of Bitcoin; one of the most prominent examples is Bitcoin Foundation. As volatile as Bitcoin can be, the method does not cause disruption to the conventional financial system. It is worth mentioning that the current value of 1 BTC is around US $700 (November 2016), based on CoinDesk chart. Reported by The Guardian last year, a man who had bought $27 worth of Bitcoin in 2009 found that his investment turned into nearly $900k.
We know how much Bitcoin is worth in U.S. dollar because both are acceptable currencies and open for trading. There are two ways to get Bitcoin:
- Mining: it comes with rewards and you help Bitcoin network to thrive in the financial system one transaction at a time.
- Purchasing: exchange conventional currencies with Bitcoins.
Bitcoin does not have physical form of any sort; it is merely a file that contains secret codes or encryption keys. You can store it in something called “wallets”. Unlike typical wallets, these storage systems can be either software or hardware (just like USB flash drive). There are wallet applications for mobile devices as well, so you can use your Bitcoin for mobile shopping. Another option is “paper wallet” where the encryption keys are stored as print-out; this is probably the best form as long as you keep the papers in safe place. It is also possible to use online an online wallet service.
Bitcoin is online money with which you can buy anything, just like the way you use regular physical money. Popular stores or companies have now accepted Bitcoin as payment options for examples Overstock, Amazon, Microsoft, Dell, Newegg, Etsy, and more.
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The best analogy to see Bitcoin is how the Internet emerged from an information-sharing platform used only by those working at CERN into an easy-to-use platform for everyone. It was text-based program operated and used by only a tiny fraction of the community. Over time, entrepreneurs developed the platform and transformed it into an interesting tool with exciting interface for anybody. At this current condition, Bitcoin is more or less similar to the Internet in the early 1990s. Bitcoin is growing at rapid rate and soon the world will not be able to resist its existence.
As we can see, Bitcoin WILL be a Major Player for years to come!