With the recent attention to Bitcoin, GIH has been researching how the process of Bitcoin works. The team has read many articles about it and even suggested to investors to invest in it more than 6 months ago.
First, we need to understand what Bitcoin is and how it works.
Steps to use and mine Bitcoin
First you need to get a Bitcoin ‘wallet’ which is the electronic equivalent of a pocket wallet. It can be an app for your smartphone, a web wallet, or a desktop wallet. See Wallet chooser:
Your Bitcoin wallet is what allows you to transact with other users. It gives you ownership of a Bitcoin balance so that you can send and receive bitcoins. Just like email, all wallets can interoperate with each other. Before you start with Bitcoin, be sure to read what you need to know first.
Get started fast and easy
Once you have your Wallet, you can accept Bitcoins. Bitcoins can be purchased or mined. In the case of purchase, there are Bitcoin exchanges where users purchase Bitcoins at the market rate, minus the spread, similar to the Forex market or any other.
Bitcoin is called a “cryptocurrency” because it’s based on encryption. But since Bitcoin is created by processing power, it can be said to be ‘backed’ by processing power. It’s interesting that, here’s a case where pure processing power can be used to create money. There are so many miners now, and the puzzles have become so difficult, that mining doesn’t have the same return that it did in the early stages.
Because Bitcoin is only issued in 25 Bitcoin blocks, Bitcoin mining pools have formed. In a pool, each user contributes his processing power and based on his share of contribution, receives his share of the Bitcoin. Several large pools have emerged as primary Bitcoin miners, see a comparison of pools here.
Bitcoin mining is interesting for a few reasons, but what is very striking is that it’s a currency based on technology (encryption and computing power) which works primarily through the internet (it is possible to exchange Bitcoin in person). If one looks at the current model of the currency system we use today, it’s extremely outdated. The first central bank to issue fiat currency was the Bank of Amsterdam in 1609:
As the first public bank to “offer accounts not directly convertible to coin”, the Bank of Amsterdam established in 1609 is considered to be the precursor to modern central banks. The central bank of Sweden (“Sveriges Riksbank” or simply “Riksbanken”) was founded in Stockholm from the remains of the failed bank Stockholms Banco in 1664 and answered to the parliament (“Riksdag of the Estates“). One role of the Swedish central bank was lending money to the government.
It should not need to be mentioned that in 1609 there was no science that we have today, no technology, no computers, internet, etc. With all its flaws, the current global financial system may simply be outdated. In a world of abundant resources, markets that can crash in nanoseconds, just in time inventory, automation and robotics, it is maybe inappropriate to use a financial system which is 400 years old. Bitcoin may be the new technological alternative currency, but if not, it certainly can serve as a good template for future currency systems.
Recent news about Bitcoin:
http://www.alloscomp.com/bitcoin/calculator Bitcoin Mining Calculator