The Bitcoin basics

The way Bitcoin works seems difficult to understand for anyone but a computer geek or financial wizard. However, it could determine the future of banking and it’s receiving plenty of attention from central banks.

This article explains the basics. If you want to know more detail, the internet has plenty of websites dedicated to crypto currencies such as Bitcoin. However, look for the reputable sites, not just the ones who want you to invest.

Bitcoin is a digital currency, unlike fiat (conventional) currency. It’s different because it’s not just money stored in a bank account. Its value is not necessarily linked to fiat currency (ie $100 equals one Bitcoin). 

You can buy Bitcoins with normal money by contacting a crypto currency broker (just Google it). You can then trade with it or simply hold it as an investment.

Bitcoins are essentially blocks of secure data. Moving this data from one person or place to another verifies a transaction a bit like paying by credit card. But it requires huge computing power. Users called “miners” allow their computers to be used by the system to safely verify the transactions. A miner who successfully generates a new block gets new Bitcoins, which can be spent on goods and services.

So if it’s a digital currency that creates “wealth” defined in crypto-graphic terms, how can it be spent? It’s not a lot different than paying for something using a debit card.

Your Bitcoins are kept in a program called a wallet, which has your password and a connection to the Bitcoin system. If you want to trade, you send a transaction request to another user, buying or selling, and you both agree. The system verifies the transaction and securely transfers the value from one user to the next. 

There’s no centralised bank or credit system – the peer-to-peer network completes the transaction with the help of Bitcoin miners. The transaction is anonymous because the buyer and seller are represented only by random numbers.

There’s so much more to Bitcoin than this newsletter can hope to cover. Our advice if you’re looking at investing in Bitcoin or any crypto currency is to do your homework. While many companies now accept Bitcoin currency, its long-term viability is unclear. Fortunes have already been made – and lost – with Bitcoin. Don’t be one of the losers.

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