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Frequently Asked Questions
How does Bitcoin work? From a user perspective, Bitcoin is nothing more than a mobile app or computer program that provides a personal Bitcoin (money) wallet and allows a user to send and receive bitcoins with them. Behind the scenes, the Bitcoin network is sharing a public ledger called the "block chain." This ledger contains every transaction ever processed, allowing anyone to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own Bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. This is often called "mining."
How are bitcoins created? New bitcoins are generated by a competitive and decentralized process called "mining." This process let's individuals be rewarded by the network for their services. Bitcoin miners are processing transactions and securing the network using specialized computer hardware to solve very complex mathematical equations, called "proof of work," and are collecting new bitcoins as a reward.
The Bitcoin protocol is designed in such a way that new bitcoins are created at a fixed rate. This makes Bitcoin mining a very competitive business. When more miners join the network, it becomes increasingly difficult to make a profit and miners must seek efficiency to cut their operating costs. No central authority or developer has any power to control or manipulate the system to increase their profits. Every Bitcoin node in the world will reject anything that does not comply with the rules it expects the system to follow. Bitcoins are created at a decreasing and predictable rate. The number of new bitcoins created each year is automatically halved over time until bitcoin issuance halts completely with a total of 21 million bitcoins in existence.
Why do bitcoins have monetary value? Bitcoins have monetary value because they are used for financial transactions for buying and selling of any kind of products and services. Bitcoin has the characteristics of money: durability, portability, fungibility, scarcity, divisibility, and recognizability; which is based on the properties of mathematics, rather than relying on physical properties (like gold and silver) or trust in central authorities (like FIAT currencies). With these attributes, all that is required for a form of money to hold value is trust and adoption. In the case of Bitcoin, this can be measured by its growing base of users, merchants, and startups. As with all currency, bitcoin's value comes only and directly from people willing to accept them as payment.
What determines bitcoin’s price? The price of a bitcoin is determined by supply and demand. When demand for bitcoins increases, the price increases, and when demand falls, the price falls. There is only a limited number of bitcoins in circulation and new bitcoins are created at a predictable and decreasing rate, which means that demand must follow this level of inflation to keep the price stable. Because Bitcoin is still a relatively small market compared to what it could be, it doesn't take significant amounts of money to move the market price up or down, and thus the price of a bitcoin is still very volatile.
What is Bitcoin mining? Mining is the process of spending computing power to process transactions, secure the network, and keep everyone in the system synchronized together. It can be perceived like the Bitcoin data center except that it has been designed to be fully decentralized with miners operating in all countries and no individual having control over the network. This process is referred to as "mining" as an analogy to gold mining because it is also a temporary mechanism used to issue new bitcoins. Unlike gold mining, however, Bitcoin mining provides a reward in exchange for useful services required to operate a secure payment network. Mining will still be required after the last bitcoin is issued, and rewards will mostly be based off of transaction fees.
How does Bitcoin mining work? Anybody can become a Bitcoin miner by running software with specialized hardware. Mining software listens for transactions broadcast through the peer-to-peer network and performs appropriate tasks to process and confirm these transactions. Bitcoin miners perform this work because they can earn transaction fees paid by users for faster transaction processing, and newly created bitcoins issued into existence according to a fixed formula.
For new transactions to be confirmed, they need to be included in a block along with a mathematical proof of work. Such proofs are very hard to generate because there is no way to create them other than by trying billions of calculations per second. This requires miners to perform these calculations before their blocks are accepted by the network and before they are rewarded. As more people start to mine, the difficulty of finding valid blocks is automatically increased by the network to ensure that the average time to find a block remains equal to 10 minutes. As a result, mining is a very competitive business where no individual miner can control what is included in the block chain.
The proof of work is also designed to depend on the previous block to force a chronological order in the block chain. This makes it exponentially difficult to reverse previous transactions because this requires the recalculation of the proofs of work of all the subsequent blocks. When two blocks are found at the same time, miners work on the first block they receive and switch to the longest chain of blocks as soon as the next block is found. This allows mining to secure and maintain a global consensus based on processing power. Bitcoin miners are neither able to cheat by increasing their own reward nor process fraudulent transactions that could corrupt the Bitcoin network because all Bitcoin nodes would reject any block that contains invalid data as per the rules of the Bitcoin protocol. Consequently, the network remains secure even if not all Bitcoin miners can be trusted.
|Bitcoin Wallets: Anyone wishing to use bitcoins is assigned one or more bitcoin addresses, and wallets allow a user to complete transactions between addresses by requesting an update to the block chain, the public transaction log instrumental to Bitcoin. Wallets come in a variety of forms: apps, websites, hardware devices, and paper tokens. When making a purchase with a mobile device, the use of QR codes to process transactions is possible.||Payment Processing: Bitcoin processing fees are lower compared to credit cards or money transfers. The advantage of lower fees may lessen in the future. Without a sustained increase in the value of bitcoins relative to other currencies, payment processing fees will rise over time, and once the bitcoin ceiling is reached, processing transactions will no longer be rewarded with new bitcoins. This is due to the fact that the total number of bitcoins is capped at 21 million and because the creation of each successive bitcoin requires a larger amount of payment processing work than the last. Fees are independent of the amount being sent, making Bitcoin attractive for larger money transfers.|
|Anonymity: While Bitcoin uses cryptography, it does not do so to protect the privacy of individuals, and all transactions are logged in a public file called the blockchain. It is possible, although extremely difficult, to associate bitcoin transactions with real-life identities. In addition, Bitcoin intermediaries such as exchanges are required to collect personal customer data but are held to privacy regulations such as with banking institutions.||Exchanges: Through various exchanges, bitcoins are bought and sold at a variable prices against the value of other currency. While the exchange rate of Bitcoin is still volatile since it's still by large in early adoption, on average bitcoins have appreciated rapidly in relation to other currencies including the US dollar, Euro and British pound.|
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Address: A Bitcoin address is similar to a physical address or an email. It is the only information you need to provide for someone to pay you with Bitcoin. An important difference, however, is that each address should only be used for a single transaction.
Block: A block is a record in the block chain that contains and confirms many waiting transactions. Roughly every 10 minutes, on average, a new block including transactions is appended to the block chain through mining.
Block Chain: The block chain is a public record of Bitcoin transactions in chronological order. The block chain is shared between all Bitcoin users. It is used to verify the permanence of Bitcoin transactions and to prevent double spending.
BTC: BTC is the common unit of Bitcoin currency. It can be used in a similar way to USD for US dollar.
Confirmation: Confirmation means that a transaction has been processed by the network and is highly unlikely to be reversed. Transactions receive a confirmation when they are included in a block and for each subsequent block. Even a single confirmation can be considered secure for low value transactions, although for larger amounts like 1000 US$, it makes sense to wait for 6 confirmations or more. Each confirmation exponentially decreases the risk of a reversed transaction.
Cryptography: Cryptography is the branch of mathematics that lets us create mathematical proofs that provide high levels of security. Online commerce and banking already uses cryptography. In the case of Bitcoin, cryptography is used to make it impossible for anybody to spend funds from another user's wallet or to corrupt the block chain. It can also be used to encrypt a wallet, so that it cannot be used without a password.
Double Spend: If a malicious user tries to spend their bitcoins to two different recipients at the same time, this is double spending. Bitcoin mining and the block chain are there to create a consensus on the network about which of the two transactions will confirm and be considered valid.
Hash Rate: The hash rate is the measuring unit of the processing power of the Bitcoin network. The Bitcoin network must make intensive mathematical operations for security purposes. When the network reached a hash rate of 10 Th/s, it meant it could make 10 trillion calculations per second.
Mining: Bitcoin mining is the process of making computer hardware do mathematical calculations for the Bitcoin network to confirm transactions and increase security. As a reward for their services, Bitcoin miners can collect transaction fees for the transactions they confirm, along with newly created bitcoins. Mining is a specialized and competitive market where the rewards are divided up according to how much calculation is done. Not all Bitcoin users do Bitcoin mining, and it is not an easy way to make money.
P2P: Peer-to-peer refers to systems that work like an organized collective by allowing each individual to interact directly with the others. In the case of Bitcoin, the network is built in such a way that each user is broadcasting the transactions of other users. And, crucially, no bank is required as a third party.
Private Key: A private key is a secret piece of data that proves your right to spend bitcoins from a specific wallet through a cryptographic signature. Your private key(s) are stored in your computer if you use a software wallet; they are stored on some remote servers if you use a web wallet. Private keys must never be revealed as they allow you to spend bitcoins for their respective Bitcoin wallet.
Signature: A cryptographic signature is a mathematical mechanism that allows someone to prove ownership. In the case of Bitcoin, a Bitcoin wallet and its private key(s) are linked by some mathematical magic. When your Bitcoin software signs a transaction with the appropriate private key, the whole network can see that the signature matches the bitcoins being spent. However, there is no way for the world to guess your private key to steal your hard-earned bitcoins.
Wallet: A Bitcoin wallet is loosely the equivalent of a physical wallet on the Bitcoin network. The wallet actually contains your private key(s) which allow you to spend the bitcoins allocated to it in the block chain. Each Bitcoin wallet can show you the total balance of all bitcoins it controls and lets you pay a specific amount to a specific person, just like a real wallet. This is different to credit cards where you are charged by the merchant.
Bitcoin Discussion Forum
Bitcoin Discussion Forum
Index of forum topics, main discussion page. Come here to talk Bitcoin. Everyone is welcome. From beginners, to pros; everyone has a voice.
Bitcoin General Discussion
News, articles, and everything else that doesn't fit within the other forum topics.
Bitcoin for Beginners
Beginners, ask your questions here. Bitcoin is not always easily understood. There are no "stupid" questions.
What makes Bitcoin tick? Discuss market value, pricing, trading, exchanges, influence, politics, etc., here.
Hardware, Bitcoin clients, best practices, information; discuss everything related to Bitcoin mining here.
Discuss Protocol, Cryptography, Technology, Development, and all the other stuff layman's don't understand here.
Discuss other topics that might be of interest to the Bitcoin community here.
See where it all started with the original 2008 Bitcoin paper published by Bitcoin creater, Satoshi Nakamoto, whose real identity still remains a mystery to this day. If you have some time on your hands, you can read archived emails starting in November 2008 from Satoshi, where he first publicly started speaking about Bitcoin. He later began work on the Bitcoin SourceForge project, where his emails were archived there as well. Bitcoin Real-Time Market Prices and Resources was created with love, by David Shares. If you like this, then you may like these. Consolidated ticker powered by the good folks over at Firebase, and some charting data via StatsMix. Iconset provided by VisualPharm under a creative commercial license.
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