Money plays a central role as a recognized means of exchange and payment. Printed money is losing importance and money in digital form is becoming increasingly important. It is quite possible that the electronic money stored in the form of smart cards or in computer programs that can replace traditional coins and bills from the system.
But not only the money in paper or coin form gets through the digitization of such competition; it adds completely new digital currencies that are being reinvented and put on the market. One such attempt is the bitcoin. The aim of this series is to give a first impression of how bitcoin work in general. In addition, the use case in online trading will be explained in more detail and thus the opportunities and risks associated with it.
To understand the essence of the topic, general concepts are first clarified that are essential for the understanding of the housework. These terms are about bitcoins and online trading. First, it will be highlighted what are bitcoins – how these cryptocurrencies work, what are the differences with other traditional currencies, how they are acquired, what are their uses, and how society currently views bitcoin as a currency alternative.
Then what is online trading and what features will be explained. Once these basic terms have been clarified, the reader will be shown what to pay attention to shop online with Bitcoin. It deals with possible legal challenges, such as the right of purchase or the right of exchange, when a transaction with Bitcoins was carried out. It also explains what technical challenges are and what the process of a bitcoin transaction might look like.
Afterwards chances and risks of Bitcoins will be pointed out. In particular,security, price, anonymity, fraud etc.
Finally, a conclusion will be drawn and a possible outlook of Bitcoin for the future.
Fundamentals of the Use of Bitcoins
The term Bitcoin first appeared in 2008. Under the pseudonym Satoshi Nakamoto, a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published. A decentralized, electronic money system will be introduced, which will manage without banks. Some time later, on January 3, 2009, Satoshi Nakamoto released the first version of the Bitcoin software; an open source product that was offered i.e. in the forum of the P2P Foundation. But what about this Bitcoin? As a general attempt at definition, it can be said that Bitcoin is a digital, decentralized and anonymous online currency that is neither controlled by a government nor by a centralized organization. In addition, the term “bitcoin” defines 2 different things. On the one hand, this describes the complete currency system with the global network. On the other hand, the individual currency units in this system are also called Bitcoin.
The Bitcoin system works with an electronic wallet. Accordingly, in a transaction, bitcoin is transferred from the sender’s wallet to the recipient’s wallet. Therefore, one can compare the transaction with a bank transfer. The main difference, however, is that the transaction is through a peer-to-peer connection. The sender and recipient communicate directly with each other and are not dependent on a detour via a central authority, eg a bank.
To ensure traceability and authorization during the payment process, two keys are used. On the one hand, a private key of the sender is used. With this key, the bitcoins are signed by the owner for a transaction. This signature can be compared with your own signature. On the other hand, a public key is used, which is generated by the recipient side. This is similar to the recipient’s bank account. The public key forms a bitcoin address which must be communicated to the sender so that he knows to whom he should send the bitcoins. Thus, for a successful transaction, the recipient first sends the recipient address generated with the public key to the sender of the bitcoins, so that he can connect a certain number of bitcoins with the recipient address to a transaction. Finally, this is then signed with the private key. This type of transaction thus takes place without the specification of personal data.
In order to better understand this decentralized way of working, it is necessary to take a closer look at the Bitcoin network. Bitcoins are not like normal files that you can send. The files only exist in a specific infrastructure, the Bitcoin network. First of all, it should be noted that the Bitcoin network does not have a central instance or server that connects users. The network works exclusively via a peer-to-peer network. This means that the participants are directly connected. A key feature of the peer-to-peer network is that information proliferates rapidly. This is due to the fact that each participant automatically sends the information to the other participants. Thus, all participants of the Bitcoin network are always at the same level of knowledge.
Differentiation from conventional currencies
A key difference between bitcoins and traditional currencies is that Bitcoin is not in the hands of the state or the banks. It is thus decoupled from state currencies and is to be regarded as a separate, independent and non-governmental currency. Bitcoins are not centrally printed or generated, as it should be, like traditional currencies.
In addition, the number of bitcoins is limited. At present, a limit of 21 million bitcoins has been defined to be in circulation. The limitation is to ensure confidence in bitcoin stability. In addition, inflation and loss of value should be prevented. A common feature is that bitcoins and gold exist outside of a central monetary system. On the other hand, the amount is also limited in gold.
The primary task of bitcoins lies in the payment function. But this is not the only application field that can be accessed with bitcoins. Two additional application fields are shown below: Bitcoin Mining and the function of Bitcoins as speculation object.
Bitcoin mining can be roughly analogous to gold digging. The bitcoins to be acquired are already available and must be found. It helps a rather complicated mechanism. In the following, this concept will be explained in more detail. First of all, it should be noted that in the Bitcoin network the task of accounting is managed in parallel by each user and compared with each other. For a bank, the information would be in a central database.
The first point to note about bitcoin mining is that bitcoin transactions made by the mining are added to the shared bookkeeping in the form of blocks. The building blocks contain the hash of the previous block, resulting in a chain of contiguous blocks. This chain of blocks is called the blockchain. Finding a hash that meets certain requirements is the main task of mining. If such a number is found, a new block is generated and sent to the other network participants.
The advantage of the blockchain is that all the scraped blocks build on each other mathematically. Thus, with each calculated block, all previously calculated blocks and thus the bitcoin transactions executed are confirmed again. A big disadvantage of bitcoin mining is the high electricity costs. The mining claims very high computing power (up to 400 watts) and this for weeks.
Furthermore, one can use bitcoins as a speculative object, because it is not connected to any existing currency and have extreme price fluctuations.
Bitcoin became the global currency. Whether the digital currency will prevail at all, however, is questionable. In the broad masses, there is hardly any broad acceptance. This is mainly due to the uncertainty in the market and especially among the dealers. Many financial institutions advise against Bitcoins. They also do not want to participate in the Bitcoin business. The answer to the question of whether bitcoins are accepted by the masses depends very much on the number of users. Because when many people use Bitcoins, then the acceptance and the confidence in the digital currency system increases.
Many interested in Bitcoin and Blockchain see in this technology the opportunity to build a better and free society based not on coercion and violence, but on a voluntary basis. Many of the governments has already commented on bitcoins. By now, bitcoins have arrived in the mainstream. Bitcoin mostly can be used as private money. The mining of bitcoins is considered as a kind of private money creation. By recognizing the virtual currency, traders using Bitcoins are required to pay sales tax.