Bitcoin is the first decentralized digital currency that enables instant payments to anyone, anywhere in the world using the Internet. The transactions are done directly from person to person without the involvement of a bank in between by using Internet. Since it does not require any bank the transactions costs are much lower. A person can use them in every country. There are no accounts that can be frozen and there are no pre-requisites. Bitcoin uses peer-to-peer technology to operate with no central authority: the network carries out managing transactions and issuing money collectively.
Bitcoin is one of the first implementations of a concept called crypto-currency, which was first described by Wei Dai in 1998 on the cypherpunks mailing list and implemented by Satoshi Nakamoto under the MIT license. Bitcoin is designed around the idea of using cryptography to control the creation and transfer of money, rather than relying on central authorities.
Bitcoins can be generated all over the Internet by anybody who is running a free and open application called a “bitcoin miner”. Mining requires a certain amount of work for each block of coin. The network automatically adjusts this amount such that the coins are created at a predictable and limited rate. The creation of coins must be limited for the currency to have any value. Block creates 25 new bitcoins at present. This amount, known as block reward, is an incentive for people to perform the work (computational work) required for generating the blocks of coin. Roughly every 4 years the number of bitcoins that can be “mined” in a block reduces by 50%. In the end, no more than 21 million bitcoins will ever exist.
Bitcoins are stored in a digital wallet. It will be familiar to you if you have used online banking. When you transfer Bitcoin, an electronic signature is added using your private key. This transaction is then verified by a miner after a few minutes and stored in the network permanently and anonymously. Anonymity requires additional tools that understand the public-private key pair concept of cryptography.
The Bitcoin software is completely open-source and anybody can review the code. At present the Bitcoins are already in use for purchasing video games, books, gifts, servers etc. Several currency exchanges exist where a Bitcoin can be traded for Dollars ($), Euro or any other currency. It is very easy for small businesses on Internet to use bitcoin payments. It does not cost them anything to start accepting Bitcoins; there are no chargebacks and no fees.
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Some General Bitcoin associated terminology:
Address: A Bitcoin address is like a physical address or an email. You need to provide this information for accepting bitcoin payment from someone.
Blockchain: This is a public record of all Bitcoin transactions.
Block: A block is a record in the Blockchain that contains and confirms many waiting transactions.
BTC: Abbreviation for Bitcoin currency.
Mining: This is the process of making a 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.