What are Bitcoins and Cryptocurrency?

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Bitcoin basics

Bitcoin, crypto-curreny and alt-coins are virtual money

  • Bitcoin, Crypto-Coin, and Alt-Coin are all different types of virtual money that is transacted through a computer network and the internet. Bitcoin was just the first one invented by Satoshi Nakamoto and no one knows who this really is. I will use bitcoin to mean all types of virtual monies unless otherwise specified. Bitcoin is computer data that is highly encrypted so no one can steal it or counterfeit it. It is all just data with no physical object to hold in your hand, even though they do sell replicas of bitcoins which are only as valuable as the gold or silver they are made from.
  • There is no central bank or organization controlling bitcoins, it is all transacted through the internet using two encrypted codes. One code is the address of the wallet holding the virtual money and the other is the code key to access it. Virtual coin transactions work through a peer to peer network on the internet because, as stated above, there is no central agency controlling them. People, like you and I, use special computer hardware to mathematically solve the encryption codes for every transaction. This is called bitcoin mining and anyone can do it. The encryption codes are very complex and it can take several minutes to solve the equations completing the transaction. Miners are rewarded for this work with a newly created bitcoin or the type of coin that the encryption is being solved for. And so, there are no fees on transactions unless the company that holds your wallet charges one, but it would be very minimal of less than 1 cent at this time.
  • Because bitcoins and virtual money are not controlled by a bank it is anonymous with no bank charges. Being similar to a Swiss bank account without the fees because its all transacted through number codes. Bitcoin wallets are used to save, trade and spend virtual money. There are several types of wallets in existence today. Some more secure than others, but all are safer than bank checks and credit cards, as long as you keep your wallet's address and the key code to access it secure. It's also good to make a backup copy of your wallet address and key code.
  • Bitcoin is now accepted by many companies and merchants, both online and offline. The list of merchants accepting bitcoins grows everyday. Bitcoins are legal to use, trade and buy in the US and most countries around the world at this time. And because miners earn new bitcoins for mining there are a few websites that offer free bitcoins to anyone who registers with them. This is being called a Bitcoin Faucet because they give free virtual money daily. They literally earn money by giving it away on the transactions they mine when doing it. They earn a new bitcoin by mining and give a fraction of it away to create the transaction they are mining. This is an ingenious new way to earn money and I will discuss this in more detail below.

Bitcoin Billboard

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Bitcoins and Crypto-Currencies

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Bitcoin is a new kind of money

Bitcoin and other Cryptocurrencies also known as Alt-Coins are a new type of money. Bitcoin was the first type of electronic money created by Satoshi Nakamoto. Bitcoin and all electronic money is decentralized currency, meaning that it's not controlled by any single organization, bank or government. And to make it secure it is encrypted with very advanced mathematical encryption codes that at this time are virtually impossible to crack. The encryption used for these virtual monies is more advanced than the banks currently use. In other words, it's easier to crack the banks decryption codes than it is to crack cryptocurrencies. The software is distributed freely and is an open source project, meaning anyone can see the programming code and use it as they wish. At this time there are hundreds of thousands of people using alt-coins, saving, trading and spending them all over the world.

Bitcoins are a start up currency that is being traded through a network of users like yourself. These people are checking and solving the encryption codes when a transaction is made to be sure they are real. It's a true peer to peer network run by anyone who wants with no central agency involved. The network runs through the internet over thousands of computers. The people that process these encrypted transactions are called miners and so the network cannot be broken. The entire internet would have to go down for bitcoins to be lost and long before that happened the banking system would go down. There is no one you have to trust, as with a bank or Wall Street.

There is no way bitcoins can taken from anyone without the two key codes needed to access them. And each coin transaction has its own unique set of codes. There are no names attached to virtual money, only the code keys making the transaction anonymous. They can only be tracked by following the transaction trails and then finding the person who holds the key codes. This is why they were being used on the illicit website called the Silk Road. The Silk Road was shut down by the US feds because they followed the transaction trail while the processes were still in action. The feds confiscated the computers that held the code keys and found the name of the person who owned the bitcoins and ran the illegal website.

Just as the internet opened a new world for publishing and email allows us to send letters anywhere instantly and for free. As Skype allows us make phone and video calls all over the world for free. Bitcoins and all the different types of virtual currencies can instantly be transacted anywhere over the internet for free. Bitcoins are more efficient than all competing currencies and its changing the way we use money. It has been said that our system of money is antiquated and has remained as it was since medieval times. It is high time for a drastic new update to our money systems.

This new money will drive its adoption in the marketplace worldwide. Similar to how computers were adopted by everyone because they made business and many aspects of life easier, faster and more efficient. Just as when the internet first came onto the scene people were confused because it was all new and its true power was not yet apparent. Everyone's interest is rising in cryptocurrencies and will continue to do so until we learn the true benefits this brings for all.

At this moment in time the price of a bitcoin is fluctuating daily, similar to how gold fluctuates. A few months ago one bitcoin rose to worth over $1000, then it fell to $200. You can check its daily current value at Coindesk.com.

A currency creates its value when it is widely used. And its use spreads by first providing promise and then living up to it with a high incentive. Bitcoin and all virtual money offers the biggest opportunity for innovation that our world has seen since the industrial revolution. It is the future of money and its time has come.

Virtual encrypted money

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Cracking bitcoin codes

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What is bitcoin mining

Bitcoin mining

Bitcoin miners are actually running specialized software on computers to solve the mathematical equations that decode the bitcoins and match the keys. The hardware they use is specific to this purpose because they need to sort through and solve an intense array of numbers. So that no one can spend fake bitcoins, as they would by writing a bad check. This is intentionally made very difficult so people cannot spend the same bitcoin twice. As more and more bitcoin and alt-coin transactions are processed these equations become more difficult to solve.

The way this all works is instead of having one central authority or bank who secures and controls the exchange, the work is spread over a network on the Internet. Miners collect transactions into large blocks and string them together into one continuous block chain. The block chains will not permit any conflicting data so that people cannot cheat and spend the same bitcoin twice. The block chain lets everyone know exactly which transactions are a true count and can be trusted and are then recorded.

Miners need to compute a crystallographic hash of the block that meets certain criteria to avoid blocks being counterfeit or stolen. This they call block hashing and requires special equipment to accomplish. To hash the blocks and find the correct key combination the computer needs to guess from very many blocks until they get lucky and find the correct key combination. At present it takes miners about ten minutes to hash and solve a bitcoin transaction, other crypto-coins take different amounts of time. Because of this intense process bitcoin miners are paid newly created bitcoins for their work.

There is a cap on the amount of bitcoins that will ultimately be created and at this time we are about halfway there. After they reach the bitcoin limit they will not be rewarded a new bitcoin and may need to charge a fee or interest for this work, but we have many years until bitcoins max out. In the meantime anyone can become a miner and earn brand new bitcoins for their work. Other virtual coins can take less time to solve because they use a different type of code and their max limits are all different. They are creating new virtual coins all the time, so there will always be mining opportunities.

Also virtual coins include code in their programs that define how to choose between conflicting transactions and what to do if two people find the same valid blocks at the same time while mining. Obviously, they originally called this mining because the people who solve the equations are comparable to miners digging for gold. And because there is no middleman to take their cut and the miners are paid with newly created bitcoins the transactions are free or very inexpensive, as compared to normal fiat money and banking. This all works the same for all the virtual coins. It's all data information running on computer networks and there is no physical money involved. Even though, there are replica coins made of gold and silver that are worth the cost of the metal they made from.

Transact bitcoins with your smartphone

Phone app wallet allows payment with bitcoins
Phone app wallet allows payment with bitcoins | Source

Hardware wallet

Flashcard type bitcoin wallet
Flashcard type bitcoin wallet | Source

Litecoin paper wallet

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Bitcoin wallets

Bitcoin wallets are how you save, collect and spend bitcoins. There are several types of wallets that can be created and used. A bitcoin wallet is essentially an address and a key code that allows access to the address. The address is a string of numbers and numerals similar to an email address and be scanned with a square QR barcode. The keys work the same and can also be saved as a QR code that can be scanned to use. It takes those two components to access your bitcoin money. You give the merchant your bitcoin wallet address and then use the key code like a pin number to verify it. Then the money is instantly sent to the merchant with no fees. Unless of course the wallet company charges a fee and if so it would be a fraction of a penny. The transaction is then verified by bitcoin miners. It takes up to 10 minutes to compete final payment, unlike checks and credit cards that take days to finalize and have fees. Once a bitcoin transaction is paid it cannot be reversed, unless the person paying decides to give the money back. There are no "stop payments" on bitcoin payments.

Types of Bitcoin wallets

1. Desktop wallets - download the software and blockchain while keeping both keys on your computer. Not very practical for shopping on the street.

2. Mobile wallets - Download a phone app and keep the keys on your phone to easily spend on the street via QR codes. You can also use the NFC feature to tap your phone when purchasing while using SPV a simplified version of the blockchain.

3. Online wallets - Easy because there is no blockchain to download, but could potentailly be hacked and also you are trusting the wallet company to not steal your funds, similar to trusting your bank and merchant.

4. Hardware wallets - Basically advanced flash cards that hold your blockchain and key codes. Easy and secure.

5. Paper wallets - A QR code card for each, your wallet address and another QR for your key. Easy, cheap and safe, as long as you don't lose your two cards. Or simply write down your bitcoin address and key code to use. Keep them in a secure place, as they are the keys to your money.

Its always best to backup your wallets key codes. For a paper wallet keep your QR cards in a safe when not in use. It also may be a good idea to copy them in case they are lost or stolen so you can move your money quickly before it is stolen. If you have lots of virtual money it's good to have several wallets to store your money. As the old saying goes, "having all your eggs in one basket can lead to disaster".

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Bitcoin faucet

Bitcoin faucets and websites that literally give free bitcoins and other virtual money away daily to anyone who registers with them. They actually earn new bitcoins by mining them to hash and solve the transactions and then give a small portion of that to the member who they are mining it for. They are earning money by giving it away. This will only last until bitcoins are maxed out at 21 million and then there will be no more new bitcoins created. But there are many other virtual coins with new types being created all the time. So when bitcoins max out there are still Litecoins, Feathercoins, Earthcoins, Dogecoins and many others that have higher limits or none at all. So this can go on indefinitely.

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Bitcoin ATM
Bitcoin ATM | Source

Using bitcoins

There are many internet and retail stores that now accept bitcoins and other virtual coin transactions. The list of merchants accepting virtual coin is growing everyday. Bitcoins can be traded from one person's wallet to another and also sold for fiat money through several trading companies. Bitcoins are easier and less expensive to use to purchase products than credit cards and also much more direct and faster. They can be used worldwide through the internet without converting to local currencies. There is no wait time as with checks and no credit checks as with opening a credit card. They are more convenient than fiat money and an improvement on our current antiquated money system. The strength of bitcoin is in the numbers of people who use them and as this grows so will their strength. They cannot be taken away, unless someone hacks your codes. For them to be lost the whole internet would have to go down. But then as soon as it comes back online they would be back. No bank or government can take them away from you and as of this time there is no tax on them, unless you convert them to fiat money or sales tax when making purchases. Governments and banks fear them because it takes them out of the money loop and virtually will make banks and the Federal Reserve obsolete. Virtual money is our future and this is the very beginning of a whole new monetary system that will take the world by storm, just as the Internet has and artificial intelligence (AI) is about to. As AI progresses virtual money will become even easier to use and mine.

Alt-Coins are cryptocurrency alternatives to bitcoin

SHA256 based Alt-coins
Scrypt based Alt-coins
Hybrid/Other Alt-coins
Namecoin - NMC
Litecoin - LTC
Primecoin - XPM
Peercoin - PPC
Dogecoin - DOGE
Quarkcoin - QRK
Davcoin - DVC
Worldcoin - WDC
Nextcoin - NXT
Terracoin - TRC
Feathercoin - FTC
 
These are just a few of the many types of Alt-Coins in existence today.

Cyrptocurrency Quiz - How safe is it?

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Bitcoin faucet website

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Research for this hub

The information in this hub was researched and is accredited to all the webpages linked within the copy, the photos and the list of links on this page.

Thank you for taking the time to read my hub.

© 2015 Randy Hirneisen

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2 comments

moviesreviews profile image

moviesreviews 22 months ago from NY

A great Article. Very well put together and very informative. I look forward to more of your work.


Randy Horizon profile image

Randy Horizon 22 months ago from Philadelphia Author

Thank you Moviesreviews. I'm glad that you liked it, as it was fun to reseach and write. I put some time into this one.

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