How Bitcoin Works

Bitcoin is a buzz word on the streets. Almost everyone seems to be talking about bitcoin with some claiming how rich one can become through bitcoin err... you know the stories. Previously, in the article, tech powering crypto currencies, we explored the technology that powers this digital money and its properties that make it all work. Digital money is slowly gaining  wide acceptance and given time, it could be the future of banking and finance.  Today we are going to narrow in on this crypto currency highlighting the ecosystem that makes it all work. Let us start:

You are going to need a wallet

A bitcoin wallet is software that allows you to perform bitcoin transactions. You will often hear the term client used in place of bitcoin wallet but be of good cheer, a client and a wallet are the same thing. It is through this wallet that we send and receive bitcoins. When we purchase an item using bitcoin this initiates a sending mechanism, which is synonymous to spending in the physical world hence a deduction of our balance in our wallet occurs. Unlike a regular wallet that stores your money, bitcoin wallets do not store your bitcoins. In fact, your bitcoins are stored on the block chain. What your bitcoin wallet stores are your secret private keys to access your bitcoins. Your wallet then uses these private keys to identify and transact using the bitcoins you own on the block chain.

Wallets are an essential part of the bitcoin ecosystem as they allow the user to look into the bitcoin network and get associated wallet information. Without the wallet, the bitcoin network ceases to exist as one cannot move the bitcoins from one address to another.

 Types of Wallets available at your disposal

 Software Wallets

The most common software wallet is the Bitcoin Core software application. Once installed it will begin to download a local copy of the blockchain, which takes time. When a software wallet has capabilities to download a local copy of the blockchain, it is termed a full-wallet. Other software wallets that do not download the blockchain  synchronizing with the bitcoin network are termed thin clients.

Hardware Wallets

This type of wallet guarantees safety of your bitcoins as it is offline most of the times. The only time a hardware wallet comes online is when one wants to perform a transaction. They are less susceptible to malware attacks that target software wallets making them the wallet of choice among some individuals due to the extra security. The Trezor wallet is popular example of a hardware wallet.

Hosted Wallets

Using a hosted wallet is convenient as you do not have to install a client and consequently  a copy of the blockchain. Instead, a company that specializes in bitcoin wallet hosting hosts the wallet for you. However, it is important to note that you are giving up some of your control for convenience.

How does one mine for bitcoin?

Mining is carried out through the use of mining software. Bitcoin mining is a game of chance and is resource intensive . This resource expenditure, especially in terms of electricity consumption may not justify the mining operation at all. Notable open source bitcoin mining software include bfgminer and cgminer. It is also possible to mine for bitcoin using the bitcoin core wallet but it will use your machine’s CPU slowing down the overall performance. To realize a significant gain mining bitcoin, you may need to acquire specialized hardware as you will be competing with other miners to solve a block. If other miners are running more powerful hardware, it means they may solve a block at a much faster rate than you do and gaining the reward.  Besides CPUs you can also run your bitcoin mining software on GPUs.

Okay, so that’s  the story on bitcoin and its ecosystem. Feel free to find out more on the web if you are interested in bitcoin mining.