Bitcoin – Digital Money for the Future

On various news portals you can read different headlines about Bitcoins. Some say Bitcoins will revolutionize the economy, others claim that Bitcoin is just a hype, a temporary trend. But what is a Bitcoin? What does a Bitcoin look like? And how did some people get so rich with Bitcoins so quickly?

What are Bitcoins?

Bitcoin can be defined in many ways. Some call it a protocol, some a platform and some a digital or crypto currency. And somehow, it's a little bit of everything.

To be precise, Bitcoin is an application based on blockchain technology, and bitcoin, written in small letters, is spoken of when the digital currency is meant. As the term "digital currency" already suggests, payments can be made with bitcoins. Payments are referred to as transactions. There is also something like an bank account for digital currencies. This is called a wallet. However, the wallet does not store account balances but keys. These keys are as addresses to which transactions stored in the bitcoin blockchain are assigned.

To prevent unauthorized persons from making transactions on behalf of another person, these keys must be secure. This problem was solved using public and private keys or public and private keys. The keys are created as pairs by mathematical functions. Each public key has exactly one private counterpart. Messages encrypted with a public key can only be decrypted with the corresponding private key.

The public keys can be distributed at will and sent to other people. They are used to specify the target account. The private keys must be kept to yourself. These ensure that no one can make transactions on behalf of another person.

How are Bitcoins created?

Conventional currencies are generated by banks. They determine how much of which currency is in circulation at any time. Bitcoin is different: here, the currency is generated by the use of computing power. The process of generation is called mining. During mining, the so-called mining nodes, which are the computers involved in generating the currency, try to solve a mathematical problem. The first computer to solve the problem sends its solution in the form of a block to everyone else. If all the other nodes agree with the solution, the block is considered valid and will be added to the blockchain.

For example, if a person in a pizzeria wants to pay for the pizza in Bitcoins, the process looks like this:

1. The person sends a transaction with the desired number of Bitcoins via a wallet software to the address, or public key, of the pizzeria.
2. The wallet software signs the transaction with the person’s private key. That way, the pizzeria can be sure that the transaction really does come from the right person.
3. The transaction is sent to the Bitcoin network.
4. Miner nodes include this transaction in the creation of new blocks.
5. As soon as the first miner node has found a solution for the mathematical problem, it sends its solution to the other nodes.
6. They check whether the result is valid.
7. As soon as enough nodes have confirmed the result, the transaction is considered to be finished and the newly created block is valid.

The pizza is not considered paid until point 7 is completed. This process can easily take up to 10 minutes.

How can I buy bitcoins?

If you have Swiss Francs and want to buy Euros, you go to the bank to exchange your Swiss Francs for Euros. The amount of Euros you get is calculated by the current exchange rate. With bitcoins, it’s similar. However, they are preferably purchased on the internet on various platforms. One of the most popular is Coinbase.

To buy bitcoins you have to create an account at Coinbase first. This is relatively complex: in addition to the standard two-factor authentication, a photo of your identity card and a copy of a driver's license or a similar ID must also be sent. As soon as this is done, money has to be transferred to the Coinbase account by means of a SEPA payment. It may take a few days for this payment to be completed and accepted. Once the money is on the Coinbase account, you can easily buy and sell different crypto currencies. It should be noted that a transaction fee is always charged for the purchase of crypto currencies. Among other things, this serves as a reward for the miner node. Caution is therefore necessary: A price increase of the cryptocurrency does not necessarily mean that a sale leads to a profit.

Conclusion

Bitcoin is intended as a means of payment in which banks do not have to act as a trustworthy third party. To purchase Bitcoins, an account must be created with a platform. These platforms offer you a comprehensive wallet software with which transactions can be executed. Transaction fees are charged for each transaction. These transaction fees must be taken into account in any calculations of possible trading profits.

Besides Bitcoin, there are several other cryptocurrencies. The cryptocurrencies usually differ in the way new blocks are created and validated. Moreover, not all cryptocurrencies are suitable for the same type of payment. For example, Bitcoin would not be suitable for a payment that must be completed within seconds, since transactions take a few minutes to complete.