First of all, where did this Bitcoin come from?
The idea of transferring / receiving money / making investments / no transaction charges without being subjected to the exchange rates between the counties had always been around. With the rise and proliferation of the Internet, this idea became something beyond an idea.
Paypal has been realizing some of this vision but it too fails on the ”no transaction charges” part.
The most important point for the realization of generating an alternate virtual currency was bringing the virtual currency to light. As the trust behind the real currencies in the world is established based on the fact that they cannot be counterfeited, the virtual currencies were needed to be established based on a counterfeit proof trust.
Then it was stipulated that if an algorithm so solid that it cannot be decrypted by even the most powerful computers in the world, is written, the issue with the trust could be solved.
Therefore the Bitcoin algorithm emerged as the result of this idea. It is said that by using the current level of technology, one should require 40 years to decrypt the algorithm. And 40 years is more than enough for the proliferation of the virtual currencies and virtual valets, for their acceptance by people and for its adaptation by the companies and by a generation.
What is the Bitcoin?
The Bitcoin is a puzzle, made up of 21 million parts. The parts of the puzzle are sequential components that are not similar to each other but are associated with each other. In the real world, as the pieces of the puzzle fit to their designated slot, solving the puzzle becomes easier while in the Bitcoin universe, as the pieces are solved, placing the next piece becomes harder and harder. It is not possible to go an upper level before a block is solved.
With the current processor technology even if all the computer processors in the world is combined and work non stop, the estimated time, required to solve the piece 21 million of the puzzle is at least 40 years.
The Bitcoin is actually a mathematical algorithm, first suggested by a Japanese math and networking team with the codename Satoshi Nakamoto. The name Satoshi Nakamoto is derived from the names of companies like Samsung, Toshiba, Nakamichi, Motorola etc. and the team named the algorithm Satoshi Nakamoto algorithm.
The real identities and the fate of the members of the team are unknown because those guys know how the algorithm is solved and how it proceeds sequentially. They may manipulate the virtual currency. If they ever disclose the currency encryption, which is said to be unbreakable, 5 years later, each one them will be a billionaire. There was one goal for the team, producing large scale numbers that are next to impossible to break, and independent from each other but nevertheless in relationship with each other.
But what does a Bitcoin Algorithm Look Like?
If you want an example, the last 5 digits of the root of a huge prime number are known;
12154858787845121248787887441121215498787878787887 45454551512369871215485878784512124878788744112121 5445252145874547
You need to find what this incredibly large prime number is and in fact you need to do it with 16 bit encryption.
The only way to know what this prime number just by knowing the last 5 digits of its root is trial and error. The person, who eliminates the probabilities by the way of trial and error and finds the prime number itself is called the Miner.
The network system gives you 1 Bitcoin if you find this prime number.
Initially, earning bitcoins was easy for the miners, who employed brute force tactics.
However, when the upper level blocs became accessible in time, employing brute force tactics also became harder and harder. The Computer A works tirelessly to find the first 15 digits of the prime number. The second 15 digit block is handled by Computer B and the Computer C works to find the third 15 digit block.
And it is also required to combine the numbers that they find in order to see whether they fit together or not.
Let assume that they tested out all possibilities and found the prime number. The next block of the prime number comes in as 60 digits, not 45 digits, which makes it harder to crack. The difficulty increases logarithmically, not linearly.
In a nutshell, mining is now incredibly difficult to make. The only thing that we need to know in Bitcoin Algorithm is that it is a math question that is unbelievably hard to solve. The reason behind this difficulty is to prevent random guys to produce fake bitcoins.
So where is this Bitcoin?
The world of Bitcoin is a protocol much like the application layer protocols such as HTTP, POP3, SMTP, FTP. For example, in order for you to get service from the FTP protocols, you need to employ a software such as CUTEFTP. You need to install an open source Bitcoin client program in order to use the services of Bitcoin. This program gives you the access to the Bitcoin protocols, kind of connecting you to the Bitcoin network. You have a virtual valet there to use when you enter into the protocol.
You can spend your virtually currency and shop in the world of Bitcoin.
In order to deposit or withdraw from this network from the real world, there are virtual exchange offices.
You send an amount (for example 100 USD) from your real world bank account to the IBAN of the virtual exchange office in HTTP layer. The employee of the virtual exchange office checks out his / her account through internet banking and the moment the real currency appears in the account of the virtual exchange office, 10 btc of virtual currency is remitted to the bitcoin valet of the sender. A small commission is deducted from the amount.
The virtual exchange offices buy the Bitcoins, held by the minders and sell them to the real life brokers in exchange of commission.
What actually is sold by the virtual exchange offices is a block of decrypted prime number. It is real in theory but it is not a tangible commodity. And that is precisely what scares off many investors. It makes no sense to pay a 1000 bucks to a 16 digit number. And there is always the risk of the Bitcoin Network to be shut down by the FBI in one morning due to money laundering charges. In this Bitcoin system, the reward is very high because the stakes are very high.
How can I convert my bitcoins to my actual account?
You can convert your virtual currency in your bitcoin wallet to the real money in the virtual exchange office. The similar systems are actually in frequent use in games. In games such as the Warcraft, the virtual gold coins are sold in real money. 1000 virtual gold is sold for 10 USD.
Just like you have to log into Warcraft game in order to spend the game coins, you also need to log into the network in order to spend your bit coin. You can send money to another wallet in the same network for free.
What is a bit coin investment?
As I told you above, cracking codes to earn bitcoins gets harder in time. The bitcoins you have become more valuable by the day. You increasingly sell your bitcoins to the other with higher prices in virtual exchange offices.
What is the Bitcoin Risk?
For example, you buy 1000 in game gold coins in Warcraft. If the publisher company blizzard pulls the plugs of the game servers, your gold coins become an instant nothing and you can claim nothing as well. You money turns to dust.
And if the bitcoin network is shut down like this, your bitcoins become dust as well.
What makes the bitcoin so attractive?
One bitcoin, which did not even worth 1 USD 3 years ago, can now be traded up to a 1.000 USD. In this context, it is not very different than the Microsoft or Apple shares of the distant past. Their value can be zero few days later but they may also reach to higher values. There are even investment funds that only trade bitcoins. The reality that the digital products increasingly find their way in our daily life support the notion that billions will be introduced or will be using the bitcoin in a couple of years. It is possible that the bitcoin will continue be on demand until the production of 21 billion bitcoins is completed by keeping this limited supply feature at the forefront. The Cahairman of the FED, Bernanke, in a letter that he penned for the US Senate, indicated that “if the new technological advancements allow the safer, faster and more effective transaction to the Bitcoin and similar virtual currencies, they will be successful in the long run”
The investments adopted the notion that the FED began acknowledging the Bitcoin and brought the value of 1 bitoin to its current levels.
So, in a nutshell; various people and company work on Virtual Currency Systems manufacturing. They produce encryptions that are very hard to crack by math algorithms and they try to sell and communalize this virtually.
The daily trade limit is around 1.000 USD in order not to involve in money laundering. So you can withdraw maximum 1.000 USD from your digital wallet.
Having no Central Bank behind the Bitcoin may be an advantage in terms of the supply side but it is a real problem in the assurance aspect. When the Bitcoin system experiences a problem, the digital Bitcoins cannot be used even as the toilet paper.