What is bitcoin?
Bitcoin is the best known cryptocurrency at this moment, also called virtual money. Bitcoin is decentralized, this means there is no owner or central control. Transactions in the Bitcoin network are sent in a cryptographic form and processed by miners using computers and specialized hardware with huge calculating power.
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How does the Bitcoin network work?
The Bitcoin netword is based on a blockchain, an administration of all transactions between the different bitcoin addresses. Every 10 minutes a new block will be created, containing all transactions of these 10 minutes plus the previous block. Every transaction will exist forever (as long as the blockchain exists).
Along with the information of the transaction, other information can be added in a block. It is not possible to change or delete this information. Adding information will create many interesting user posibilities, which do not exist in other payment methods.
Bitcoins can be mined by using special hardware to translate encrypted codes. These codes represent all transactions in a block, and the miner who finds the block first will be rewarded with an amount of bitcoins (currently 12,5). The financial effort you have to put into mining, like costs for electricity and hardware, is called “proof of work”.
This makes the bitcoin blockchain super secure, because to alter or delete something in the blockchain you will have to input a greater proof of work than all of the current miners together. At that moment the total computing power (hash power) that is mining on the Bitcoin network is so incredibly huge, that for a single person, company, or even government, it is impossible to deliver more hash power to over ride the current mining operation.
Besides finding new blocks, miners will also earn on transaction fees. The most amount of bitcoins that will ever be found is limited to 21 million, and they will be harder to find because every four years the mining reward will be reduced by fifty percent. The value of bitcoin will not be affected by dilution, because the supply is limited. That understood, bitcoin can be a profitable investment in times of quantitive easing and you can store them safely on a hardware wallet.
What is an altcoin?
Besides bitcoins, there are many altcoins on the market. An altcoin (alternative coin) is a virtual coin, same as bitcoin, based on cryptography. There are hundreds of different alt coins available and most of them have the goal to become an improved version of Bitcoin.
The best known alt coins are Ethereum, Lightcoin, Zcash and Monero, and are designed with a focus on a specific application. Some of these coins are certainly interesting, but the grand question is will they win the race with Bitcoin to become the most dominant coin. Bitcoin is by far the most famous and accepted coin. All the hardware wallets are also supporting some alt coins.
Advantages of crypto currencies
Cryptocurrencies like Bitcoin contain big advantages compared to fiat money. A Bitcoin wallet is anonymous and so you dont have to provide your name and address. As long as you own the public key of the wallet, you have the power over the bitcoins you own.
Furthermore the transaction costs are extremely low and there is no 3rd party able to cancel your transaction. In a short period of time you can send an unlimited amount of money all over the world. Also, small payments are possible with Bitcoin, creating many new possible applications.
Maybe the most promising application, not known by many people yet, is the ability to add information into the blockchain. For example, you can make a house payment and directly register the ownership in the blockchain. Besides ownership you can also register other things like your identification.
In the future, Bitcoin and blockchain technology will create applications like smart contracts and automated payments between machines, changing the status quo. In addition, crowd funding will be raised to a new level.
Bitcoin use can apply to many financial functions like store of value (gold, silver), hedging against crashes of stocks, other financial products, and of course, just as a payment system.