For the uninitiated, bitcoins are one of several alternative currency systems floating around out there. It is similar to a standard currency, but with a number of significant differences. First of all, it isn’t backed by any central institution; rather it exists independent of government standards and laws. By contrast, a standard currency is a debt currency, which means that it is owed back (usually in terms of larger sums) by those who issue them. In this way, the entire supply of money is at risk of debiting the currency holder, which causes interest to pile up.
This is not the case with bitcoins, however. While it isn’t technically “backed” by anything, it instead acts like a commodity. That is, each time someone spends using the system, their transaction earns some money in return. That is how the system works. In addition, the entire supply of bitcoins is subject to the market whims of the buyer. That means that prices can fluctuate up and down and, on occasion, the system can even be created artificially.
So, how does this play out in practice? For one thing, there aren’t any fixed amounts of bitcoins out there. Rather, each transaction that goes through is only designated to certain coins. So, there is no” bitcoin pyramid” or “bitbank” as some have called them. Instead, transactions are designated according to which currency the buyer prefers.
There are two reasons for this system’s” decentralized” nature. First, it gives each user a feeling of being in charge. Each time you use the system, you are actually deciding how much you want to spend. There is no one controlling the money, deciding how much to lend, or deciding when to lend it. This sense of control helps to foster an environment of fair investing where everyone has a fair shot at making money. However, because this system is “decentralized”, there is no single central location where the money is held.
That means that every person who receives or sends bitcoins has to trust that his or her wallet will be able to give them enough money to do what they wish. That is to say, if a friend were to receive ten bitcoins, they would need to have some extra cash to go along with it in order to make use of the system to its fullest extent. And this creates a sense of urgency because the more someone receives, the more money they must have in order to go about their day-to-day activities.
But what about the people who are not friends but in possession of bitcoins? Suppose they suddenly lost it all and had to start again with a brand new wallet? Would the system then cease to exist? Thankfully, no. The fact is that all transactions are controlled by the users of bitcoins, meaning that if you want to exchange one form of currency for another, then you are free to do so.
This freedom to exchange coins for other forms of money is what makes bitcoins a remarkable tool. Because there is no single central location where the bitcoins are held, there is no single place from which they can be withdrawn. As long as there is a network of computers connected to each other, then the value of each unit of bitcoins is completely up to supply.
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