Bitcoins as a Cryptocurrency

Bitcoins as a Cryptocurrency

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Cryptocurrencies is a peer to peer digital system of payment between two or more computers that have been connected together through internet. Bitcoin was the first kind of cryptocurrencies to be traded. It was first traded in the exchange centers in year 2009. However, several cryptocurrencies have been created since then

Bitcoin transaction- This a very common question that most people who are not experienced with the Idea of bitcoin ask from time to time. Bitcoin transaction takes place between one electronic bitcoin wallets to another. A digital security is always assigned to this. The history of all the transactions that have taken place can be traced back from the start to the point the bitcoins were produced up to their destination. The whole point of having the bitcoins is to spend them and not necessarily holding them waiting for the price to go up.

The funny thing about bitcoins is that they don’t really exist anywhere in terms of coins or even in a hard drive. People just talk of having bitcoins. There are no digital bitcoins held in any particular bitcoin addresses. This works the same with the bank account. There is no physical object or any digital address that one can point to contain his or her cash. The same applies to the bitcoin. Only records of transaction exist to show how transaction took place between the different bitcoin addresses. Increase or decreases of the balances are well indicated. A general ledger book called block chain is used to store all the transactions that ever took place. Transaction between let’s say two people will contain three pieces of information. The input address-this is the bitcoin address of the sender of the bitcoins. It indicates the address of the bitcoins in the first place. For example, if the transaction is between tom and Jane whereby Jane sends the bitcoins to tom, then the input address will be the address from which Jane received the bitcoins from. She may have received them from her friend eve and therefore the input address will be that of Eve. The amount-this is the amount of bitcoins sent by Jane to tom. The output- this the bitcoin address of the receiver. In this case tom is the one receiving the bitcoins and therefore the output will indicate his bitcoin address.

Two important things that are required to enable you to send bitcoins are a private key and a bitcoin address. No paper work is required to enable you to set up a bitcoin address. It is generated randomly. A bitcoin address is just simple sequence of numbers that have been randomly generated. Private Key is similar to password when it comes to the normal accounts. It’s also sequence of randomly generated numbers and letters. They are to be kept secret unlike the bitcoin address. For example, in the above described transaction, when Jane wants to send a certain amount of bitcoins to Tom, then she needs to use her bitcoin private key so as to sign a message which includes the input (Eve’s bitcoin address), the amount and the output (Tom’s bitcoin address). (Lancelot, R., & Tatar, J. 2013)

Once Jane sends the bitcoins from her bitcoin wallet, it first goes to the wider bitcoin network. Bitcoin miners then verify the transaction and then put it in to a transaction block. You have to wait until the bitcoin miners complete verifying your transaction which takes roughly ten minutes. Some transaction would even take longer than that since some of the merchants will wait until the transaction is completing hence taking the advantage of the service that you have paid for. For the low value transactions, some merchants will not wait until the transactions are completed and hence will only rely on the hope that you will not spend the bitcoins anywhere else before the transaction is complete. This only possible where the fraud risk is very low.

A case may arise whereby the input and the output amounts don’t match. Bitcoin transactions take place only in records and therefore you can have very many different transactions that are tied up. Jane may send two bitcoins to Alice or James may send Jane two bitcoins. John may send eve three bitcoins. All this transactions will be treated differently. They are not combined automatically to her bitcoin wallet. There will be different transaction records. (Forrester, D., & Solomon, M. 2013)

When Jane wants to send tom some bitcoins, her wallet will, search for a transaction with different amounts that add up to the amount of bicoi0ns she wants to send to him. If she wants to send to tom 1.5 bitcoins, the wallet will search for a transaction of 1.5 bitcoins that has taken place. None of the transactions above involved 1.5 bitcoins and none of them add up to 1.5 bitcoins. This means that Jane cannot split a transaction and will therefore be required to spend the whole output. She will be required to send one of the incoming transactions and get the rest as change. Now that Jane needed to send 1.5 bitcoins to Tom, she will just have to send the two bitcoins she received from James. Here, Jane is the input while Tom is the output. Jane’s wallet will have to automatically create two outputs for the transaction between her and Tom. Keeping in mind that Jane only wants to send 1.5 bitcoins to tom, one of the transactions will contain a new address that will hold the 0.5 bitcoins that is her change and the 1.5 bitcoins address to Tom.

Some bitcoin miners charge some fees for bitcoin transaction that has been successful. One the challenges faced previously is the mode of calculation of the fees to charge for every transaction. The methods used in the past were so complex. An update to the main software is required so as ease the way the transaction fee is handled. However there are some bitcoin miners who do not charge any fees for any transaction.

There are no receipts for the transactions that have taken place when one is dealing with the bitcoins. Improvements on the software would mean a more user-friend and mature payment work. More advance features may be provided so as to get native bitcoin transactions and therefore get a receipt or a confirmation from the web page. ( Dominic, H. September 01, 2013)

References

Dominic, H. (September 01, 2013). What is Bitcoin?. Xrds: Crossroads, the Acm Magazine for f

Students, 20, 1, 40-44.

Forrester, D., & Solomon, M. (2013). Bitcoin explained: Today's complete guide to tomorrow's f

currency.

Lancelot, R., & Tatar, J. (2013). What's the deal with Bitcoins?. Pennington, New York: People

Tested.