There is much confusion among the investment community as to what the true definition of “bitcoins” really is. For many people, it’s a digital currency as defined by Satoshi Nakamoto in his whitepaper, the original Bitcoins. Others prefer to call it a form of currency, and a method of exchange like any other. Still others insist on calling it a form of money, a store-like commodity or even gold. But whatever you call it, there is one thing that all three seem to agree on: It’s worth something.
The miners who contribute to the pool of computing power that forms the backbone of the bitcoin network aren’t actually selling the actual bitcoin itself. Instead, they’re gambling with the future of technology. They gamble that someday, something will come up with a better way to create new bitcoins that will be accepted as legal tender. If that thing ever comes along, then they will make a profit from selling those old bitcoins and get a nice lump sum of money in exchange.
The way that this particular type of gambling works is like any other form of gambling, only with much higher stakes. You don’t have to own a lot of money to get into the game, just a computer and an Internet connection. You can use anything that has an internet connection, such as your cell phone or laptop. However, most of the software that goes into the mining process requires certain types of equipment.
All major currencies are involved in the trading process, so technically any country could issue its own bitcoins and have them floating around in cyberspace. But most people think of the bitcoins that are traded on the open market as being the “real” bitcoins because they were issued by the government of a country and are therefore recognized as legal currency. However, there are several other types of bitcoins that are being traded on the open market, including centralized and decentralized mining schemes. Whether or not you understand the difference between a centralized scheme and a decentralized one, it doesn’t really matter because both involve the same kind of miners getting together to control the distribution of the bitcoins.
A centralized scheme is run by a company or organization that controls a vast amount of computers around the globe. Those computers act like “hobbyists” for the company, who are allowed to spend their time solving complex mathematical problems that allow them to add new blocks of bitcoins. When these computers finally solve the problem, the blocks are added to the bitcoin network. When the system solves a block, everyone who is part of the mining operation is paid a fee for their work. This is how the system works – by having people who are dedicated to solving complex problems pay a fee, developers and business owners can build on top of the existing work that has already been done, and the network becomes increasingly stable.
A decentralized system on the other hand is different from a centralized system in that it is run by members or users of a given community. Usually this means people who live in small communities, but they band together in order to pool resources and save money. While no central entity controls the currencies of these currencies, they are usually made up of members who all agree on the general rules and will follow them. The major advantage of the deflation-resistant properties of these kinds of currencies is that they never experience a run on the money supply, which is what causes hyperinflation in centralized autocratic systems such as Zimbabwe.
Proof of Work is what makes the whole system secure – if someone has an innovative idea, proof of work is what allows his or her idea to be published into the ledger, and thus into the hands of others who might be considering implementing it. This is a process called “mining”, where an account is kept with a certain amount of spare computing power, that when used would multiply the value of all future transactions being performed by the account. In order for someone to obtain this power, he or she would have to prove that their idea is technically feasible and profitable. The proof of the work is made out of a specific algorithm that is embedded in the bitcoin protocol, which is then modified whenever a piece of code necessary to make it run is changed.
The main disadvantage of the bitcoin community is that it’s very difficult to regulate its growth – after all, even with governments, there is no way of telling how long a country will last, and whether it will be stable in the long run. Since the bitcoin protocol is open source and distributed, anyone can modify it and make any changes that they see fit. Because of this, there is always a chance that a malicious person or group could come up with a fork of the protocol and use it to take control of the network. However, even if this happens, the bitcoin community will still be able to identify and ban any user that they see doing something wrong.
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