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Bitcoin

Bitcoin is a virtual or digital currency also known as a cryptocurrency created by the mysterious (and unknown) Satoshi Nakamoto. Bitcoin is like other currencies: it can be used to purchase items locally and electronically. However, bitcoin differs from conventional money in that it is decentralized and fully independent. No institution controls the Bitcoin Network and it is not tied to a country like the US Dollar. The entire network is maintained by individuals and organizations referred to as Bitcoin Miners. Bitcoin miners process and verify bitcoin transactions through a mathematical algorithm based on the cryptographic (hence the name cryptocurrency) hash algorithm SHA256.

Latest Bitcoin news

Bitcoin price and chart

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using ‘Content here, content here’, making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for ‘lorem ipsum’ will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

Bitcoin is decentralized

No central authority controls Bitcoin or its network of transactions. A community of Bitcoin miners make up the network, processing the transactions. If any changes are made to Bitcoin by a developer or developers using GitHub, a 51% majority of the miners hashing power must agree upon it. This insures that, in theory, no individual can steal your bitcoins or print (create) more.

How can one change Bitcoin and Bitcoin’s code?

Everyone can contribute to and edit the Bitcoin source code since the Bitcoin protocol is open source. The Bitcoin protocol is viewable for all making it easier to spot weaknesses and provide suggestions for improvement. However, if a developer edit the Bitcoin code, that edit has to be accepted by more than 51% or more of the Bitcoin miners that runs the Bitcoin network. Bitcoin can be seen as a democratic currency where the majority always decide what will happen next with the Bitcoin source code.

Bitcoin wallet and transactions

Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for ‘lorem ipsum’ will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

Though each Bitcoin transaction is recorded in a public log called the block chain, names of buyers and sellers are never revealed – only their Bitcoin wallet addresses. Each wallet address is unique and can’t be linked to anyone unless the creator of that specific bitcoin address reveals himself.

1Lst6Ro8r5C7QrxAuoZg1LJAuQtP3W9uV2 is an example of a unique bitcoin address used for receiving and sending bitcoins.

To send, receive and create Bitcoin addresses you must have a  Bitcoin wallet (Learn how to chose the correct Bitcoin wallet here). A Bitcoin wallet is a software that’s essentially your bank account for bitcoins. Your wallet can hold as many bitcoins and Bitcoin addresses you’d like, and you can own as many wallets you want.

While bitcoin can be anonymous, that doesn’t mean it is. If you purchase your bitcoins on a Bitcoin trading platform or exchange that has your information, the bitcoins you buy can be tied back to you.

Bitcoin is transparent

Every Bitcoin transaction that has ever happened is stored in detail in the public ledger known as the blockchain. By using the blockchain, anyone can see how many bitcoins are stored on a particular address, and they can see the deposits and withdrawals to that address, but they will be unable to know who owns the address.

Bitcoin transactions cannot be reversed

When you send bitcoins to a Bitcoin address, you can not reverse the transaction. Unlike credit cards where the transaction can be disputed or reversed, bitcoins are nonrefundable. Bitcoin cannot be replaced either. If your wallet is stored on your hard drive and not in a  “cloud”, you could lose your bitcoins if you are hacked, get a virus or if your computer dies. These lost bitcoins can never be retrieved. That’s why it is so important to take regular backups and implement measures for Bitcoin wallet security.

Furthermore, merchants cannot initiate charges on you as they can and do with credit cards. Each transaction must be initiated by the wallet holder, further underlining the advantages of the Bitcoin system.

As a cryptocurrency user you need to be familiar with transaction rudiments – for the sake of your own confidence with this evolving innovation, and as a foundation for understanding emerging multi-signature transactions and contracts, both of which will be explored later in the series. This is not a technical article and explanation will focus on what you need to know about standard bitcoin transactions – the spend transactions we commonly make – and we’ll gloss over what you can safely ignore.

An infographic at the bottom of the article provides a comprehensive illustration of the entire Bitcoin transaction process from wallet to blockchain.

Note: Even the Core developers acknowledge that some of the language being used to describe transactions and their components can lead one to a mistaken concept of what is really happening. These misconceptions are avoided in the explanation below. So, while trying to keep things as simple as possible, and with the aid of a few diagrams, let’s dive right in.

Definition of terms and abbreviations

Bitcoin with a capital “B” refers to the protocol – the code, the nodes, the network and their peer-to-peer interaction.
bitcoin with a lowercase ‘b’ refers to the currency – the cryptocurrency we send and receive, via the Bitcoin network.
tx – wherever it is used in the text – is an abbreviation for ‘Bitcoin transaction
txid is an abbreviation for ‘transaction id’ – this is a hash that is used by both humans and the protocol to reference transactions.
Script is the name of the Bitcoin protocol’s scripting system that processes and validates transactions. Script is a clever, stack-based instruction engine, and it makes all transactions from simple payments to complex oracle overseen contracts possible.
UTXO is an abbreviation for Unspent Transaction Output, also referred to as an “output”.
satoshi – 1 BTC = 100,000,000 satoshi

What is a Bitcoin transaction and why?

Definition

A Bitcoin transaction is a signed piece of data that is broadcast to the network and, if valid, ends up in a block in the blockchain.

Purpose

The purpose of a Bitcoin transaction is to transfer ownership of an amount of Bitcoin to a Bitcoin address.

Outcome

When you send Bitcoin, a single data structure, namely a Bitcoin transaction, is created by your wallet client and then broadcast to the network. Bitcoin nodes on the network will relay and rebroadcast the transaction, and if the transaction is valid, nodes will include it in the block they are mining. Usually, within 10-20mins, the transaction will be included, along with other transactions, in a block in the blockchain. At this point, the receiver is able to see the transaction amount in their wallet.

Example

Here is an example transaction that was included in the blockchain earlier this year:

Bitcoin example transaction

The main components of this standard transaction are color-coded:

  • Transaction ID (highlighted in yellow)
  • Descriptors and meta-data (blue curly brace elaborated upon to the right)
  • Inputs (pink area)
  • Outputs (green area)

Bitcoin transaction inputs and outputs

Firstly, four axiomatic truths about transactions:

  • Any Bitcoin amount that we send is always sent to an address.
  • Any Bitcoin amount we receive is locked to the receiving address – which is (usually) associated with our wallet.
  • Any time we spend Bitcoin, the amount we spend will always come from funds previously received and currently present in our wallet.
  • Addresses receive Bitcoin, but they do not send Bitcoin – Bitcoin is sent from a wallet.

The amounts that go into our wallet are not jumbled like the coins in a physical wallet. The received amounts don’t mix but remain separate and distinct as the exact amounts received by the wallet. Here’s an illustration:

Example

You create a brand new wallet and, in time, it receives three amounts of 0.01, 0.2 and 3 BTC as follows: you send 3 BTC to an address associated with the wallet and two payments are made to another address by Alice.

Bitcoin Transactions Send to Wallet

The wallet reports a balance of 3.21 BTC, yet if you were to virtually peek inside the wallet, you would see – not 321,000,000 satoshi (321 mil satoshi) – but three distinct amounts still grouped together by their originating transactions: 0.01, 0.2 and 3 BTC.

Bitcoin_Transactions_wallet


The received bitcoin amounts don’t mix but remain separated as the exact amounts sent to the wallet. The three amounts in the example above are called the outputs of their originating transactions.

Bitcoin wallets always keep outputs separate and distinct.

Definition

An output is an amount that was sent (via a standard transaction) to a Bitcoin address, along with a set of rules to unlock the output amount. In Bitcoin parlance an output is called an “unspent transaction output”, or UTXO.

A standard transaction output can be unlocked with the private key associated with the receiving address. Addresses and their associated public/private key pairs will be covered later in the series. For now, we are concerned with the output amount only.

Example

Let’s consider an example by following the money in a scenario where you send 0.15 BTC to Bob.

As we have seen, your wallet does not select 15 mil satoshi (0.15 BTC) from an undifferentiated pool of 321 mil satoshi making up the wallet balance. Instead, the wallet selects a spend candidate from amongst the three existing “outputs” contained in the wallet. So, it chooses (for various reasons that are not important now) the 0.2 BTC output. The wallet will unlock the 0.2 BTC output and use the whole amount of 0.2 BTC as an input to your new 0.15 BTC transaction. The 0.2 BTC output is “spent” in the process. –Read this paragraph a second time.

Bitcoin Transactions to Bob

The spend transaction your wallet creates will send 0.15 BTC to Bob’s address – where it will reside in his wallet as an output – waiting eventually to be spent.

The 0.05 BTC difference (0.2 BTC input minus 0.15 BTC output) is called “change” and the transaction will send this back to your wallet via a newly created address. The 0.05 BTC change amount will reside in your wallet as a new output – waiting eventually to be spent. So, now, a virtual peek inside your wallet reveals the following:

Bitcoin Transactions Balance Change

Each of the three outputs that are “waiting to be spent”, is locked to its receiving addresses until such time as one or more of them are selected as input(s) to a new spend transaction.

Behind the scenes, different wallet clients apply different logic rules when selecting UTXOs as inputs to new transactions. A sane wallet policy is to use older UTXOs first, wherever possible, but implementations differ. The manner in which UTXOs are selected is not of concern to us right now, since the objective has been emphasis of the point that amounts received to our wallets remain separate and distinct.

Summary of how Bitcoin transaction works

Various received amounts don’t mix as they do in a physical wallet. Instead, received amounts (UTXOs) are used individually (or in combination) at the moment we spend Bitcoin. When creating the spend transaction our wallet selects UTXOs (of sufficient value to satisfy the amount we want to send) and typically creates two new outputs: one for the receiver and one for the change we receive back to our wallet. The change becomes a brand new UTXO in our wallet, and the amount we send becomes a UTXO locked to the recipient address – which may or may not be associated with a wallet, e.g. cold storage. The original UTXO used as input to the spend transaction is “spent” and destroyed forever.

This has been an introduction to how outputs (UTXOs) are handled by wallet software. Once a UTXO is selected for expenditure, it requires the private key associated with the address that received it. This private key redeems the UTXO and allows it to become an input in a new spend transaction. The mechanism whereby previous transaction outputs are reused as the inputs to new transactions is central to the Bitcoin protocol’s function – and exactly as per Satoshi’s design.

Bitcoin is secure

Proponents of Bitcoin tout its formidable security, and with good reason. In theory, unless 51% of the systemis controlled by one party, Bitcoin is virtually unhackable. For instance, in order for someone to change a transaction or double spend a Bitcoin, they would have to obtain majority control of the system and modify every miner in this majority. When there is a disagreement in the block chain, the system overrides the minority with the data agreed upon by the majority.

However, there have been concerns that different mining companies and mining pools should be able to reach 51% of the Bitcoin hashing power and perform a so called 51% attack on the Bitcoin network.

How are bitcoins created?

Bitcoins are created through a process known as mining. Mining is the term used by those who contribute to processing transactions. Miners process and secure the network using specialized hardware that “mine” for new bitcoins. As “payment” for their contribution, they are awarded new bitcoins. This is how new bitcoins are generated.

New coins are created at a fixed and decreasing rate that is predictable. The number of coins created each year is halved over time until 21 million bitcoins are in circulation. At this point, bitcoin miners will be rewarded by transaction fees.

When a miner has successfully created a new hash, the block is sealed off and added to the block chain. 25 bitcoins are awarded to the miner who discovered the new hash. The number of bitcoins rewarded per block is cut in half every four years. Blocks are solved an approximate rate of 6 per hour.

Why use bitcoins?

Bitcoins are attractive to a large number of people of an equally large number of reasons. Bitcoins can be anonymous, near instantaneous and offer a level of control over your money like no other traditional currency. There are no banks that can take away your money, and Bitcoins are deflationary in nature, while e.g. USD is inflationary where your money depreciate over time. Bitcoins are also speculative in nature drawing the attention of investors.

Merchants are drawn to Bitcoin because of the low fees. Merchants typically pay 2-3% fees from credit card processors, whereas many types of transactions are free with Bitcoin. Transactions are free if several conditions are met. Any transactions that don’t meet thee requirements are charged 0.1mBTC (0.0001 BTC) per 1,000 bytes. Typical transactions are 500 bytes but do not meet the priority requirement and thus are charged a 0.1mBTC fee regardless how many coins are transferred. You can view the live Bitcoin price here.

How to obtain bitcoins?

There are several ways to obtain bitcoins. The most common way is to purchase them on a Bitcoin exchange. You can also purchase bitcoins on Ebay locally through e.g. LocalBitcoins.com.

Bitcoins can also be obtained by becoming a part of the Bitcoin network and start mining for bitcoins. Before the days of ASIC miners, individuals could set up their computers to mine and earn bitcoins easily. Those days are long gone due to the difficulty to mine Bitcoin, the difficulty level of Bitcoin, has risen enormous making it harder and harder to earn bitcoins with the same equipment. Becoming a miner and seeing positive ROI would mean a substantial investment and is now left to the big companies and wealthy investors. For most individuals, purchasing your Bitcoin through a Bitcoin Exchange is the best option. You can also find ways to earn free bitcoins.

What affects the Bitcoin price?

The Bitcoin price is the monetary cost of a bitcoin. The term “price”, as used here, is not to be confused with “value“ which is a perceived regard for Bitcoin’s benefits and usefulness. The Bitcoin price is expressed as an exchange rate in relation to another currency. So, for example, the Bitcoin-to-Dollar exchange rate may be $1,750 for one bitcoin, written as $1,750 BTC/USD.

By design, a total of 21 million Bitcoins will be created over 100 years according to a logarithmic release function. At the time of writing, just over 13 million bitcoins are in circulation, meaning that an additional 8 million bitcoins will be mined over the next 95 years. Given this timescale and the decelerating rate of increase of the Coinbase, the supply of bitcoin can, for practical purposes, be assumed to be constant.

Bitcoins in Circulation Sept 2014

With increased usage and wider adoption of Bitcoin, the demand for bitcoins is always increasing. With a constant supply and increasing demand, the only factor in the equation that can budge is the price of bitcoin – by going up. Hence, assuming increased demand, the Bitcoin price gradually increases over the long-term.

The many functions of Bitcoin

Bitcoin has many functions and uses, but we will only consider those that are salient to price fluctuations:

  • Bitcoin Payment Network – Bitcoin as a currency
  • Bitcoin Storage and Transfer – Bitcoin as a store of wealthand medium of value transmission
  • Bitcoin Exchange Rate – Bitcoin as a market instrument and commodity

Bitcoin payment network

Bitcoins are transacted on an ongoing basis and around the clock. At the time of writing an average of 62,000 Bitcoin transactions are conducted daily with an average volume of $50mil per day.

Of course, transactions over the Bitcoin network do not directly affect the market price of Bitcoin. In the sense that an active Bitcoin network reflects a healthy protocol enjoying plenty of usage and demand, there is an indirect influence. Only where bitcoins interface with other currencies – at exchanges – is there a direct impact on the price of Bitcoin.

Buying Bitcoin

Every bitcoin exchange transaction that involves the purchasing of bitcoin via another currency, whether fiat or cryptocurrency, has the effect of pushing the bitcoin price up. Because the bitcoins are changing hands – from the exchange’s wallet to the buyer’s wallet – there is an accompanying Bitcoin network transaction. However, it is the exchange transaction that counts toward an uptick in the Bitcoin exchange rate. Routine purchases are made daily, for various purposes, and typically increasing toward month-end:

  • Company salaries
  • Wallet balance replenishment
  • Buy-and-Hold investment purchases
  • Incidental purchases destined for paying merchants
  • Purchases intended for transmission

Selling Bitcoin

Every exchange transaction that involves the selling of bitcoin, i.e. exchanging for fiat or another cryptocurrency causes a downtick in the price of Bitcoin. Let us consider the last example listed above, namely usage of the Bitcoin network as a means of money transmission.

Someone working in the US, and paid in US Dollars, wants to send money to their family in Zambia. Instead of using the illustrious Western Union, they opt for the Bitcoin payment network. No queues, no forms to fill in, no proverbial rubber gloves, and no extortionate fee. They purchase bitcoin via an exchange that offers BTC/USD, send the bitcoins to a relative’s Bitcoin address, and 30 minutes later the relative in Zambia redeems some (or all) of the bitcoin for Kwacha via a local exchange offering BTC/ZMK.

The original bitcoin purchase would have caused an uptick (no matter how small) in the BTC/USD exchange rate. Half an hour later, the redemption sale via a Zambian exchange would cause a downtick in the BTC/ZMK exchange rate.

The above example also serves to illustrate the effect of money flow that causes some currencies to increase at the expense of others. Here are some more routine bitcoin sales that put a downward pressure on the Bitcoin exchange price:

  • Merchants who accept Bitcoin
  • Miners “cashing out” to pay bills and expenses with fiat
  • Redemption of transmission bitcoin (as discussed above)
  • Partial or full conversion of bitcoin salaries to fiat

It is frequently alleged that Merchants convert any and all bitcoin they receive straight to fiat due to Bitcoin’s volatile intraday price swings. This seems a sound strategy, although it must be pointed out that no single financial policy applies to every business. It may very well be the case that some companies receive astute investment advice and either hold bitcoin amounts or channel them into investment funds. This would have the same effect as long-term bitcoin storage. Hoarding effectively keeps bitcoins out of circulation and leads to price appreciation as increasing demand for a limited supply of bitcoin raises cost per unit.

In the case where merchants convert bitcoin receipts straight to fiat there is, indeed, a downward pressure on price. However, it is balanced by the upward pressure caused by consumers (or their bitcoin paying employers) purchasing bitcoin with the aim of eventual spending. If this market force were not constantly equilibrating the Bitcoin price, then the absurd implication would be that one of Bitcoin’s primary aims, namely that of being a payment network, is also its undoing.

Bitcoin marketing instrument trading

The speculative market for trading the Bitcoin price chartis sizeable. Bitcoin’s performance as a market instrument is spectacular and qualifies the cryptocurrency as a Super Commodity. No speculative instrument has ever achieved the phenomenal growth of Bitcoin. From Bitcoin’s exchange rate of $0.08 in June 2010 to its all-time high near $1,150 in November 2013, it had grown 1.4mil percent in less than three-and-a-half years.

Whereas the exchange transactions discussed in the section above represent recurring monthly or daily expenses, their relative volume is miniscule when compared to the millions of bitcoin being bought and sold in the speculative Bitcoin market every month.

Buy-and-hold investors have been included in the category above (rather than here) merely because their buying and selling of bitcoin is infrequent. The present category does include, however, the early adopters – a group that includes Satoshi Nakamoto and most of the earliest Bitcoin miners. Their bitcoin holdings are sizable and their special status as founders of the Bitcoin network entitles them to profit-taking for buying houses, cars and other sizeable purchases typically only available via fiat payment.

The players exerting influence on the Bitcoin price in this category are:

  • Retail exchange traders
  • Early adopters “cashing out” to fiat
  • Institutional entities such as investment funds and ETFs.

What about news? Does that move the Bitcoin price?

News announcements frequently coincide with price movements in the market. There is some debate as to whether the relative positivity or negativity of a news announcement causes a corresponding upward or downward movement in price. Evidence suggests that market participants are catalyzed into action by news announcements but that the direction of price movement is mostly unrelated to the actual content of the news and determined by the social mood at the time.

Notice, in the following chart, how eBay “considering Bitcoin” apparently ignites a rally, yet Dell – the world’s largest IT retailer – actually accepting Bitcoin payment leads to a sell-off.

Bitcoin Market and News Reaction

In summary

The pushes and pulls on the Bitcoin price are diverse. Some are slow but steady, like the gradually rising Supply/Demand curve for a stable bitcoin supply base. Others are violent and sentimental, such as the speculative trades that see the buying and selling of tens of thousands bitcoin via exchanges every day.

Bitcoin’s price chart shows a long-term rising average price despite the often opposing forces exerting their influence on the market. Merchants and consumers each balance the other’s predominant buying or selling tendency.

Banks and governments are for the most part reacting inappropriately to the Bitcoin disruption. Some are embracing the innovation while others are stuck in hubris.

Some aspects of Bitcoin, such as Contracts, have not been explored and promise to add additional value, and, hence, price increases in the future.

What determines the value of Bitcoin?

Bitcoin’s value is a perceived regard for its benefits and usefulness. The term value, as used here, is not to be confused with pricewhich is the monetary cost of a bitcoin. The usefulness and consequent value of Bitcoin is a result of many aspects of its innovation, its network, and its features. This guide discusses the most important factors that lead its users to consider Bitcoin to be valuable.

Scientific value

To the general field of Science, the Bitcoin innovation is valuable for having solved the long-standing Two Generals Problem (or Byzantine Generals’ Problem). Satoshi Nakamoto’s clever solution to the dilemma of digital double-spending is achieved via a self-organizing and time-based consensus record. The blockchain, a shared public ledger, is maintained by the peer-to-peer nodes that populate the Bitcoin network.

Technological value

Because Bitcoin is decentralized via a distributed peer-to-peer network, there is no central server that the Bitcoin protocol depends upon for its existence. Like BitTorrent, Bitcoin is, therefore, censorship-resistant – it cannot be shut down. This aspect of Bitcoin is critical since it means that Bitcoin’s continued usage is not subject to any external authority’s approval, opinion or action. Being a censorship-resistant alternative to official currency and payment systems makes Bitcoin an irreversible disruptive technology.

Social value

Satoshi Nakamoto’s innovations in the field of Computer Science are significant milestones. In addition, social implication of the way Bitcoin innovates payment and transactions is that it eliminates Trust. A distributed ledger and decentralized network means that no single entity needs to be trusted in order for the Bitcoin protocol to function. Each Bitcoin user owns and controls their own money outright, and is solely responsible for its security and usage. No third party, such as a bank or centralized issuer, needs to be implicitly trusted to hold, disburse or maintain one’s bitcoin holdings. This trust-less dimension of Bitcoin eliminates the risks associated with having to trust external authorities – in fact, the network effect of Bitcoin’s decentralization will be to, over time, eliminate centralized authorities everywhere.

Token of value

Although a bitcoin can be copied many times, it can only ever be spent once. This design feature can be verified by making a copy of an existing Bitcoin wallet to another computer. The same bitcoins will exist in two physical locations, but only the first spend transaction will succeed. The network will recognize a second attempt to spend the same bitcoins as a double-spend and reject it. This is the critical innovation that sets Bitcoin apart from all previous attempts at creating digital currency.

Bitcoin’s design value

With the solution to double-spending as its foundation, Bitcoin’s explicit design features offer users additional value:

1. Payment method (currency)
2. Storage of Wealth (secure storage and transmission)
3. Decentralized Public Transaction ledger (blockchain)
4. Contract Mechanism (mostly unused despite its vast potential)

In day-to-day usage, the first three applications of Bitcoin are pervasive and often overlap.

Secured value

Bitcoin uses public-private key pairs to secure transactions. A Bitcoin address is a public key generated from a private key held in a user’s wallet. A Bitcoin transaction destined for an address generated by a wallet is signed with that address’s public key, and can only be “unlocked” (or spent) with the matching private key. Hence, Bitcoin transactions are secured against theft. The underlying mechanism that prevents double-spending secures Bitcoin against forgery.

Value in development

Bitcoin is made available as Free and Open Source Software under the MIT license. Additionally, the protocol is also developed via the Open Source project model which encourages community contribution and collaboration.

Collaborative development of publicly available source code is considered to be preferable to closed source code developed by a contained team. Bugs and security fixes are identified and fixed quickly – and around the clock – while the principle of strength in numbers and diversity of skills allows greater productivity.

The Bitcoin Core Developers are mostly unpaid volunteers who maintain and manage the Bitcoin source code. If their work was any less critical and exciting, one could describe it as a “thankless task”, yet they represent some of the hardest working developers in the field. The coredevs contribute thousands of hours of code writing and rigorous adherence to Satoshi’s design specifications in order to translate the Bitcoin vision into reality.

Network value

The Bitcoin network is a decentralized peer-to-peer network that, ideally, is both distributed and diverse. The more widely the peer-to-peer nodes are distributed, the more decentralized the network. The more diverse (non-similar) the nodes are, the broader the representation on the network and, hence, it is more resilient and secure. The Bitcoin protocol is designed to seek consensus amongst nodes, and greater decentralization means a healthier, more robust network. All of these factors contribute to a more valuable blockchain.

Miners are valuable

Bitcoin Miners are rewarded bitcoins for processing transactions into blocks. Mined blocks are typically appended to the blockchain, and become part of the public ledger. By processing transactions, building the blockchain, and hosting the peer-to-peer nodes that maintain network consensus, miners represent the backbone of Bitcoin’s distributed network. For their task of keeping the network functional at all times and maintaining the precious blockchain, miners (in a close tie with the developers) are the Bitcoin
protocol users who add the most value.

Value transmission and storage

The world’s reserve currency, along with most other national currencies, can be exchanged for bitcoins and stored or transmitted via the Bitcoin network. It seems to that, as the amount of money increases, so the benefits of using Bitcoin storage/transmission also increase.

Bitcoins in storage can be secured by different means, including passwords, biometric readers and multiple signature transactions. Although theft of, say, a password or human error can still result in loss of stored bitcoins, the risks are far less than in the case of physical assets such as paper money or gold bullion. Transmitting bitcoins via the payment network is cheaper and faster than transferring an equivalent amount via traditional channels, and less cumbersome and more secure than transporting an equivalent amount of bullion.

Contract and application value

Bitcoin Contracts are described by Satoshi Nakamoto, although this aspect of the protocol has found few applications to date. Contracts extend the multi-signature facility of Bitcoin by allowing two or more parties to engage in agreements that are fulfilled by events that are external to the Bitcoin network. Examples include Options Contracts, Wills and even simple binary bets such as the outcome of the Brazilian Women’s Volleyball match. In the future, this facility of Bitcoin will be better understood, used more frequently and add more value to the protocol.

The distributed blockchain is designed to accommodate alternate chains, thereby opening the door to applications that both use and enhance the Bitcoin protocol. These distributed applications will add value by making Bitcoin more useful.

In Summary

We’ve seen how Bitcoin’s value cannot be reduced to one single element or feature. Many aspects of the cryptocurrency contribute to its usefulness and offer benefits that outweigh traditional paper money and its encumbent systems. As a decentralized network with a consensus-based ledger, the Bitcoin blockchain has features that are innovative and encourage further innovation. Bitcoin’s Open Source Software model facilitates additions and improvements.

The value of Bitcoin’s core function of being a payment, storage and accounting network is evident from the fact that users are willing to purchase bitcoinstransact in bitcoins and use its networked ledger. At the time of writing an average of 62,000 Bitcoin transactionsare conducted daily with an average volume of $50mil per day.