Bitcoin - Term Overview

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Bitcoin is a digital currency or cryptocurrency that can be used to exchange goods and services like any other currency in places where it's accepted. Bitcoin, with the symbol ฿ and abbreviation BTC or XBT, is a free and decentralized electronic currency that allows direct transaction without any intermediary.

Bitcoin was created by Satoshi Nakamoto in 2009, along with the software that supports it. To this day it remains a mystery who is behind that name, a person or an institution. Bitcoins are created through a process known as bitcoin mining, which we will explain below.

Bitcoin functions

While bitcoin doesn't exist in a physical way, it has the same functions as other money, but unlike a bill or a non-virtual currency, bitcoins don't have a serial number or other type of mechanism to be able to trace to buyers and sellers using this virtual currency. This makes it attractive to those who want or need privacy in their transactions.

Unlike any other currency, bitcoin isn't fiat money. That is, it's not backed by the confidence of a central bank, by a government or by a material (for example, the gold standard ). Instead, they do use a proof-of-work system to avoid double spending and reach a consensus among all the nodes operating on the network. This consensus is known as blockchain (chain of blocks).

The blockchain

The blockchain is a fundamental piece for the operation of bitcoin, since in order to falsify a transaction, it would not be enough to change one or more computers. Being a public registry, there can be millions of copies and the registries of all the computers that keep a copy would have to be changed, which is practically unfeasible, since it's an open and public database.

In addition, bitcoin transactions handle an open source for their operation and don't need any intermediary to carry out the transactions. Therefore, it promises to have lower transaction costs.

It should be remembered that the rest of the currencies (such as the dollar, the euro, the pesos or the yen among others) do exist physically, but even so (in 2016) only 8% of the money that exists in the world denominated in those currencies are physical money, the rest is electronic money in the balance sheets of the banks.

Characteristics of bitcoin

To avoid the problems derived from a currency that isn't backed by an entity or a third party, but by a working system, the BTC has several fundamental principles:

- 21 million limit: The number of units can never exceed 21 million bitcoins.
- Can't censor: No one can ban or censor transactions that have been validated.
- It's open source: The source code used must always be accessible to everyone.
- Access to all: Everyone can make transactions in bitcoins without the need for a permit. No one can prevent participation in the network.
- It uses pseudonyms: The real identity of its owner isn't reflected and it's not necessary to identify yourself to participate in the bitcoin network, although unlike an anonymous network, it allows the possibility of generating a reputation and trust among the different users.
- It's expendable: All units are interchangeable.
- Payments are irreversible: Transactions that have been confirmed cannot be modified or deleted.

How are bitcoins created?

Bitcoin is a cryptocurrency that is created and distributed by peer networks, commonly known as P2P (peer to peer). These networks allow the direct exchange of information without the need for fixed servers. The BTC generation process is through mining. It consists of solving highly difficult mathematical problems thanks to computer processors.

The person who solves a problem receives a reward in BTC in return. Incentive that makes more people join this process. Each participant is connected to each other through the P2P system and they validate each movement in the system. Therefore, the more participants there are, the more secure the process will be. On the other hand, as problems are solved, their difficulty increases. In this way, the speed of BTC generation is controlled.

Bitcoin, as we have already explained, isn't regulated by any body, however, it's programmed in such a way that the generation rate is reduced by 50% every 4 years until it reaches 21 million BTC in circulation.

To give us an idea as of January 31, 2014, the total BTC in circulation was 12,296,500 (source blockchain.info) and 12,333,875 (according to source bitcoin.com). While the data differ slightly, it can be seen that there are more than 12 million Bitcoins on the network.

How are bitcoins used?

The time has come to see how one can handle these coins that are there but are not. Bitcoin is money, it has certain characteristics that differentiate it from other currencies. However, as a currency, it fulfills the properties of money:

- Serves as a unit of account
- Exchange medium
- Preservation of value

The latter is the one that is creating the most controversy around Bitcoin due to its fluctuating nature.

Little more or nothing must be added about its usefulness as an accounting unit. The same doesn't happen with its properties to facilitate the exchange. The appearance of bitcoin marked the breakdown of electronic commerce as it was known until then. Transactions no longer have to be channeled through banks or other trusted financial entities. Which means breaking with the corresponding service fees to which the transactions were subjected.

How to buy with bitcoin?

To pay with bitcoin we must follow the following steps:

- Convert your money into bitcoins.
- Save them in our virtual wallet created in one of the many free servers that exist.
- You can now pay and collect in BTC! To pay, you will only have to access your electronic wallet with your username and password. Enter the recipient's wallet code and the corresponding amount. To get paid, all you need to do is provide your code to the person who must make the payment.

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