What is Bitcoin and how does it work? Is it legal? Who's behind it?

What is Money?

It is just an accounting system. It is a way in which we record your assets. In simple words: What do you have? and what you owe on others?

What this money requires: A trusted third party. Somebody who guarantees money is not fake and for that government is doing our jobs for years.

So Money is just an accounting system and so is Bitcoin; Just an accounting system.

So What makes this thing so different? We will decipher that step by step.

Bitcoin is a way of recording transaction; Recording value and it does it digitally so that you and I can transfer it directly and everything is recorded in an open ledger. It monitors and updates the ledger in a collective consensus-based system.

You get away with the need for somebody in the middle having that sort of repository of all the information. So you get away with the fees, inefficiencies, and potential for corruption and risk, that comes with centralizing the information in that way.

It takes that trusted third party function and automates it. It puts it into an open ledger and puts it online for anybody to see. So every bitcoin is accounted for; so you know you are not having anything fake.

Why we require anything like this??: The idea of Bitcoin was launched just after the collapse of Lehman Brother and the after the financial crisis of 2008. The crisis clearly showed existing system had some major flaws like an untrusted third party, improper fees, and regulations, Inefficiencies, corruption etc. The current system was not that efficient and people have demanded some sort of alternative.

What was happening and what difference will Bitcoin make: Assume you are in the US and you want to send $1000 back to your country; you will need a third party i.e. credit card, debit card, Paypal, Visa, banks etc and they will also charge transaction fee for this and you also need a bank account. In Low and middle-income countries still, 47% of the population do not have a bank account. alongside that, if you are sending $100 to a third world country you can't afford to give $10 as a service charge to the Western Union.

Now, what bitcoin does it directly send the currency to another person and the bitcoin network performs the same function that Paypal, Visa does. Bitcoin gives the control to the people using it.

HISTORY: It all started with the cypherpunk (Secret messages + fringe subculture) movement in 90's. These were the people, who thought about the need and possibility of digital currency using that is anonymized using Cryptography.

Some initiatives were by:

1) David Chaum: DigiCash

2) Hal Finney- RPow

3) Nick Szabo: BitGold

How Bitcoin works?

• Satoshi took all these ideas from cypherpunks and made them work. He made an encryption-based protocol; not really a currency; utilizing ledger called Block Chain, allowing as many transactions to occur.
• All can be built into a Blockchain and it does it through a system of consensus building, and multiple computers participate in the management of Blockchain Ledger. A type of digital document that keeps tracks of all payments.
• In Bitcoin, there is a distributive ledger with no Central server.

All the other Ledgers that we have; banking ledgers, company ledgers they all sit and reside in that company which means they have one point of attack; they can be hacked.

For Example: JP Morgan Chase & Co. was hacked in 2014 by cyberthieves, compromising over 83 million accounts. Companies like Target and Home Depot were also hacked. This is just because of one central repository of information. The Bitcoin Ledger resides on thousands of computers and you can't hack that.

• Every Transaction of Bitcoin is recorded and is permanent. It can’t be altered or changed.
• But the Identity of the people are encrypted; The wallets are encrypted
• Your identity is anonymous; you don't know who is spending the money? but you know the history of each and every bitcoin out there.

Another Important element of Bitcoin Infrastructure is Miners.

Miners are the computers tasked with maintaining the ledger of Blockchain, to verify the information, to update it and make sure that it is trustworthy.

(PS: It’s the basic working; not detailed. If you are an enthusiast you need to dig deep into cryptography to clearly understand the working. You can’t find here on Quora or any other blog)

Why Bitcoins are so expensive: As the total amount of gold is fixed so is the total number of bitcoins. By 2148, there will be 21 million Bitcoins and that will be the maximum amount. As far as its price is considered it is a Demand and Supply game. Demand is increasing, so is the rates.

When you buy Bitcoin you do not pay for currency you pay for its

• Technology
• No third party Control
• Easy Transferability
• Anonymity
• Reliability

Now, Is It Legal? and if it is; Why there are so much chaos and confusion.

After the economic crisis; the bitcoin became popular. The prices were surging. People were getting aware of its importance. But on the dark side; the people knew that the large part of Bitcoin is used in Buying drugs on Silk Road. This was the Big Bang movement for Bitcoin.

Ross Ulbricht created Silk Road. What he did was merged the Cryptocurrency with the mainline user space. So people were free to trade anything they want to. Well, he was caught by the FBI but the people lost faith in Bitcoin.

So to control this unfair usage; a proper regulation was required. Benjamin Lawsky, Superintendent of Financial Services, NYC formulated BitLicence, specially tailored to Virtual currency to Regulate the usage of Bitcoin.

Yes, it is Legal. And as Bitcoin was neophyte; people took undue advantage of the technology. As any coin has two sides and so has Bitcoin. What we can do is use it to our advantage and minimize its misuse.

Hope you enjoyed...!

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