A Layman's Guide to Bitcoin and Bitcoin Mining. A New Age Currency for New Generation.

What is Bitcoin and Bitcoin Mining in layman terms

We often wonder when we see people talking about Bitcoin or Cryptocurrency. Although, it is a Small wonder because Bitcoin was first surfaced in 2009 sometime after US sub-prime crisis and it was created by an unknown person named Satoshi Nakamoto. However, identity of Satoshi Nakamoto is still one of the biggest mystery of human race. Further, 1 Bitcoin exchange rate has increased from $0.05 in 2008 to $5575 (₹358996/-) today.

What exactly is Bitcoin?

As we all know or heard of, Bitcoin is digital money. Like US Dollars ($), Indian Rupees (₹), Euro (€), Japanese Yen (¥), Pounds (£) etc. Bitcoin (Ƀ) is also a type of currency but it does not represent any Country and it’s a universal currency which is available virtually means there is no physical form of Bitcoin. Email let us send letters for free, anywhere in the world. Skype lets us make phone and video calls for free, anywhere in the world. Now there's bitcoin. Bitcoin lets you send money to anyone online, anywhere in the world and it’s effectively free.

Who regulates Bitcoin?

Generally, Central governments and Banks are the ones who issue currencies in respective countries and keep track of it so that no one can forge their currencies. They perform all the tasks like balancing and validation. But in Bitcoin world, nobody control that, yeah you read it right. Bitcoin is new kind of money and it is totally decentralized.

Bitcoin is the first digital currency that is completely decentralized. This decentralization is the basis for Bitcoin's security and freedom. This decentralized record keeping process is called “Blockchain”. Blockchain is an ever expanding public ledger and it contains the record of transactions of all Bitcoins in circulation. Blockchain or Bitcoin network is linked through thousands of machines of individual users so no bank or centralised intermediaries are required between you and whoever you're dealing with.

But if there is no central regulator, how do we know that transactions done are valid and how buyer of bitcoin can verify the authenticity? What if the chain of Bitcoin is tempered by somebody or somebody has proliferated the Bitcoin means used the same Bitcoin twice?

The answer is mining.

What is Bitcoin Mining?

Mining Bitcoins is just like mining Gold. Just like Gold, there is limited number of Bitcoins. Yes, total no. of Bitcoins to be mined are limited i.e. 21 million as decided by Satoshi initially and total no. of Bitcoins in circulation as on the date of writing this article are 16.62 million and the more that you take out, the more difficult and resource intensive it is to find.

Bitcoin Mining is the process of adding transactions to Bitcoin's public ledger of past transactions. Every ten minutes or so mining computers collect a few hundred pending bitcoin transactions (a “block”) which have latest transaction data and code them into machine language. The first miner to find the solution announces it to others on the network. The other miners then check whether the sender of the funds has the right to spend the money, and whether the solution to the puzzle is correct. If enough of them grant their approval (“longest chain”), the block is cryptographically added to the ledger and the miners move on to the next set of transactions (hence the term “block chain”). Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid transaction fees as well as a "subsidy" of newly created coins. Both of these serve the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.

A full copy of a currency's block chain contains every transaction ever executed in the currency. With this information, one can find out how much value belonged to each address at any point in history. Every block contains a hash of the previous block. Because each block contains the hash of a prior block, it proves that it came afterward. Therefore, to double-spend a bitcoin, digital bank-robbers would need to rewrite the block chain, and to do that they would have to control more than half of the network’s puzzle-solving capacity. Such a “51% attack” is practically not possible.

What is Hash function and Blockchain

Source: Bitcoin.org

For mining bitcoins, one need hardware and software but before that you must know that it is not an easy task. With desktop computers or laptops, it is practically impossible to mine Bitcoins. Mining consumes lot of power and processing rate of our personal computers is way low. Therefore, amount of bitcoin generated will not be enough to meet your electricity bill. If you are interested in mining bitcoins then here is the Definitive Guide to Mining Bitcoins. Apart from mining Bitcoins, you can also buy the bitcoin online by paying for it through your Credit/Debit Card. There are many websites/apps available including India.

What are the Advantages of Bitcoins?

à It is decentralized currency and there is no central authority. Transactions done are anonymous and identity of the person who has transacted will not be known. However, it is one of the biggest disadvantage of Bitcoins as well.

à Bitcoin can be used online for payments. Today, many big names like Dell, Microsoft, Expedia, PayPal are accepting Bitcoins. Apart from that, there are only marketplace where you can buy legitimate stuff you like in exchange of Bitcoins.

à Bitcoin can be used to send the money across the borders to your friends/relatives at effectively nil cost.

What are the Disadvantages of Bitcoins?

àBeing used in criminal activities like Trafficking and Terrorism. The recently shut down websites like Silk Road and the Sheep marketplace were the most highly publicized examples of a digital black market. They attracted criminal activity such as the sale of drugs, weapons, assassinations and other illegal services by taking advantage of the untraceable nature of Bitcoin transactions.

à Another demerit is the risk of losing your Bitcoins whether by accident or theft. Since there is no central authority and near anonymity in usage there is negligible chance of recovering lost Bitcoins. Unlike traditional banks, when you lose your credit or debit card, it is possible to block them and protect your account, but in case of bitcoins once it is lost there is no recovery possible. There have been instances where Bitcoins were embezzled by Bitcoin exchanges, theft by digital robbers and blocks were created by Bitcoin miner to themselves. Therefore, the technology is not full proof and it requires human intervention.

àAnother danger of Bitcoin users in countries like India is its acceptability and therefore risk to fraud. There is no known business operating in India which accepts Bitcoin as payment.

àOne of the dangerous demerit is it’s “Intrinsic Value”. Whenever users have felt insecure about the validity of Bitcoin, the prices have radically dropped. This was the case when Government of China and India issued warnings against Bitcoin usage, the result was shocking 30-50 percent drop in value with a very slow recovery. Other influence that can suddenly alter the value of the Bitcoin is its supply. Like any technological advancement can help improve the mining speed and eventually fluctuate the price of Bitcoins.

Future outlook of Bitcoins!

It’s important to note that any positive usage of Bitcoins at par with other physical currencies in circulation will add up the transaction cost and will automatically bring down the Bitcoin at par with using credit card in term of transaction fees and make the whole point of the currency moot.

Further, any negative action or usage will result in crash in the price of the currency. Hundreds, if not thousands, of people would find themselves holding worthless alphanumeric numbers that aren’t worth anything in trade.

It is not wrong to be hopeful that yet to launch currencies like Buttercoin and Laxmicoin will be built keeping in mind the Asian sensibility – one that places the ideal of individual freedom and community faith side by side.

There are countries including India, where huge portion of villages are still not electrified. There are places, where people do not have basic amenities and education is just a fancy word. Therefore, it is hard to imagine that virtual currency replacing paper money anytime soon – how can it when digital books have barely even begun to replace paper ones?


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  2. Inflation will bring down the real value of bank currency. Short term fluctuation in demand and supply of bank currency in money markets effects change in borrowing cost. However, the face value remains the same. In case of Bitcoin, its face value and real value both changes. We have recently witnessed the split of Bitcoin. This is something like split of share in the stock market. Companies sometimes split a stock into two or five or ten depending upon the market value. This will increase the volume of transactions. Therefore, while the intrinsic value of a currency decreases over a period of time, the intrinsic value of Bitcoin increases as demand for the coins increases. Consequently, hoarding of Bitcoins automatically enables a person to make a profit. Besides, the initial holders of Bitcoins will have a huge advantage over other Bitcoin holders who entered the market later. In that sense, Bitcoin behaves like an asset whose value increases and decreases as is evidenced by its price volatility..   Official Web site

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