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How does bitcoin work and why is it similar to the generally accepted currency?

Bitcoin is an innovative form of digital currency that functions as a decentralized, peer-to-peer currency. Based on public ledger technology, it is highly secure and transparent. Bitcoin is similar to conventional currency in that it can be used to buy goods and services. However, unlike fiat currency, it is not backed by a government, nor does it have any physical manifestation. Bitcoin’s trustless, transparent nature allows for transactions to be made without involving any intermediaries, which helps facilitate instantaneous payments and offer improved privacy. Furthermore, its decentralized nature provides users with more control over their funds than with other payment methods, as transactions on the Bitcoin network are immutable and exist without the interference of third-party financial institutions.

You may have heard that bitcoin is an illusion and a massive hallucination. Just numbers in cyberspace, a mirage, imperceptible, like a soap bubble. Bitcoin is not backed up by anything other than the faith of the people who buy it, and other people who buy it from the first. And you know … It’s true..

What is modern money??

It may not be easy to understand, but the dollar, euro or ruble is also an illusion. They also consist mainly of numbers in cyberspace. Sometimes they are stored in bills or coins. But this is only a material representation. The dollar itself also does not exist in the physical world.

Moreover, US dollars, like cryptocurrencies, are not supported by anything other than the faith of people who use them to pay for goods or services, and other people who agree to accept them in such a role. The main difference from Bitcoin is that this illusion is currently more widespread and included in the relationship of people. In other words, it is officially recognized.

In fact, almost all money is abstract and physically unrealistic. 90% of them do not have any material representation. In 2012, James Shurovieschi (journalist and author of a popular column in The New Yorker) said that “only about 10% of the US money supply – about $ 1 trillion – exists in the form of paper money and coins”.

At the moment, these numbers have changed upwards, and approximately $ 1.5 trillion out of $ 13.7 trillion are materially embodied. It’s not that the United States did not have the opportunity to print more notes, rather, it’s not necessary. Now the country’s money supply is $ 13.7 trillion, of which $ 13.5 trillion were issued after 1959. That is, for more than half a century the money supply has grown 50 times.

The dollar, euro, ruble are the so-called fiat currency. Fiat is translated from Latin as “let it be.” For example, fiat lux means “let there be light.” Accordingly, fiat denarii will mean “let there be dinars.” The same with bolivars, lira, rubles, etc. The temptation of leaders of individual states to print more money is an inefficient undertaking. Confirmation of this is inflation. Since the same 1959, the purchasing power of $ 1 has fallen below $ 0.12 by now..

Blockchain and Bitcoin were created, in part, to eliminate this historical weakness. After the 21 millionth bitcoin is mined (and this will happen in about 2140), the further production of money will be impossible.

Bitcoin and theft

how bitcoin works

Charlatans and thieves are always trying to take advantage of various schemes that are created to control and / or account for any monetary system or a truly valuable storage. There are plenty of examples: scammers from Panama and Paradise Papers, Bernard Confeld and Bernard Madoff, The London Whale, LTCM and BCCI, smart and quiet treasure thieves from the Gardner Museum in Boston, the 2008 financial crisis and its concerns, as well as theft in DAO, Mt.Gox and Tether.

All repositories of values ​​become a target for criminals. And the use of any exchange system – honest or not – creates the opportunity for theft. And yet, surprisingly, there are enough people in the world who act in good faith. Thanks to them, money systems still have not collapsed..

There are several radical differences between cryptocurrencies and dollars. For example, transactions carried out in the Bitcoin system are recorded in an undoubted account book (blockchain), which is not based on the authority of governments and banks, but on the strength of a public computer network and a mathematical algorithm that you can freely (at least theoretically) join. In addition, bitcoin production is ultimately limited.

How does the modern financial system work??

how bitcoin works

Money in itself is an illusion and a massive hallucination. You make every effort to receive, increase and preserve them, but their only reality is symbolic power. And it’s amazing if you look at the system from a certain angle.

Our common understanding of this, in fact, a sheet of paper, simple tokens or a pound coin, is united by the concept of value. This general idea has no fixed meaning; it is in constant motion. The “value” of all money, all exchange rates, is unstable and abstract. Even in the face of any attempts to secure it, for example, by setting the course against various assets (oil, gold) or by adjusting due to interest rates. Money is just a consolidated network of agreements concluded in the interests of the hive. All they have ever been is a fragile network of trusting people.

In fact, the price of coffee or avocados can change over the period that elapsed between standing in line at the ATM and going to the grocery store. And in this case, you will lose (or gain without participation) part of the money. There are many such examples. Currency value is variable. For example, water usually costs little, but during natural disasters people are willing to pay huge amounts for 10 liters. A similar example can be carried out with the tariffs of Moscow taxi drivers during the attacks.

All arguments against cryptocurrencies like Bitcoin and blockchain technologies do not take this factor into account – ordinary money is fragile and temporary. Cryptocurrencies cannot be understood even at a minimal level by those who think that money is real, tangible and “backed up” by anything other than human trust in institutions with uncertain stability.

Thus, the dollar is backed up by “the full confidence of the United States”. But what exactly does this mean? In simple words, this means that the US Treasury, in response to your request to exchange a dollar, will give you in return another same one dollar.

how bitcoin works

The minus for the adopted system is that monetary crises in unstable states like Greece, Spain and Venezuela have repeatedly led to a rise in the rate of cryptocurrencies. When in 2013 the government of Cyprus tried to resolve the crisis by changing the credit rate for citizens, the price of bitcoin reacted instantly. Perhaps this was due to the fact that some South European euro holders decided that storage in Bitcoin is more reliable than in Cypriot banks.

Our existing financial institutions are deeply mistaken. They are constantly subject to corruption, and this was long before Bitcoin became a discovery for the whole world. From the very beginning, Bitcoin was a politically motivated project, clearly built to provide unauthorized access to digital means of exchange, on which you can base a better alternative to existing banking systems.

The theory of all cryptocurrencies, including bitcoin, is that records created by a distributed computer network can be protected from unauthorized access. This technology guarantees the reliability of the currency better than any government and it is called blockchain. So far, despite several negative events, the blockchain on which Bitcoin is built has partially proved this theory. Since 2009, about 1 million Bitcoins have been stolen, but the distributed accounting system on which Bitcoin is based has still remained stable and incorruptible.

The fraud and theft that accompanied the early days of Bitcoin resemble the movie “Treasure of the Sierra Madre” – a wonderful drama of greed and corruption, based on the events of the 1920s. There is no doubt that the prospect of instant enrichment can drive people crazy. But note that the penchant for greed for crime does not depreciate gold.

how bitcoin works

It should be noted that the integrity of Bitcoin is a consequence of not only the distributed principle of action of the blockchain and smart cryptographic guarantees. An important role was played by the conscientiousness and nobility of individual developers, who helped the project grow stronger and get rid of “trembling legs”. Without the composure of Gavin Andersen, who was actually the only Bitcoin manager during the early crisis moments, the project could easily perish. Even today, various doubts and suspicions undermine the Bitcoin system, acting as a stress test.

The unreliability of the main developers, who, according to many, are now doing this for the purpose of personal enrichment, can cause severe damage not only to bitcoin, but also to the prospects of blockchain technologies in general.

Separately, it is worth mentioning that cryptocurrency speculators risked “inflating” the project at an early stage due to difficulties in creating a secure storage and system for the safe and easy use of cryptocurrency money. Due to such a catastrophe as the theft of about 800,000 bitcoins from the Mt.Gox exchange, the reputation of all bitcoin has been greatly shaken. The public reaction was as if Bitcoin itself was hacked, although in fact the criminal took advantage of the vulnerability in the exchange itself.

how bitcoin works

Saying that cryptocurrencies is fraud because bad people have done a lot of harm in the case of Mt.Gox is like saying that the financial services industry is fraud because the Sergei Mavrodi’s MMM pyramid was dishonest. Is Bitcoin used on the darknet to buy and sell drugs? Well, most hundred dollar bills have traces of cocaine. If you want to pay for someone’s services in dollars, you will essentially have to send a person a small fraction of this substance. Money is always spoiled. It matches their nature..

The blockchain system, which is now used to guarantee the security of bitcoin transactions, will soon be changed and merged with other systems. Its promise cannot be underestimated. Investors from Wall Street on Sand Hill Road have already invested significant amounts of money, time and effort into blockchain-based companies. Whatever the defects in the Satoshi Nakamoto system, released in 2009, he managed to prove that people manage to create reliable guaranteed records of transactions with other people, without relying on banks and government.

Human nature is such that it tries to deceive or play a dishonest game where possible. Even limited and unstable stability, examples of which we see in developed countries, require the vigilance and commitment of many principled people. It can never be 100% stable. Therefore, the war for preserving the illusion that money is real does not end and hardly ever ends. All this fully explains how Bitcoin works and why a different financial future may start behind this technology..

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Comments: 6
  1. Oakley

    Could you please explain in simple terms how bitcoin works and what makes it similar to traditional currency? I am curious to understand the underlying mechanisms and how it’s able to function like our widely accepted form of money.

    Reply
    1. Addison Holmes

      Bitcoin is a digital currency that functions using a decentralized technology called blockchain. When you make a bitcoin transaction, it goes through a network of computers, which validates and adds it to a “block” of transactions. Each block is linked to the previous one, forming a chain, hence the name blockchain. This system ensures transparency and security.

      Similar to traditional currency, bitcoin can be used to buy goods and services. It has value because people believe it does and are willing to accept it as payment. However, unlike traditional currency controlled by central banks, bitcoin is not issued or regulated by any government or institution.

      Bitcoin also shares some features of traditional currency, like divisibility (it can be broken down into smaller units), fungibility (one bitcoin is interchangeable with another), and scarcity (there is a limited supply of 21 million bitcoins). Additionally, it can be stored and transferred electronically, making it portable and convenient.

      Bitcoin’s decentralization and the use of cryptography make it resistant to fraud and hacking attempts. Its transactions are pseudonymous, providing a level of privacy. However, its lack of regulation, price volatility, and potential for use in illegal activities are factors that differentiate it from traditional currency.

      Reply
      1. Hannah Hamilton

        In summary, bitcoin is a digital currency that operates on a decentralized network called blockchain. It can be used to buy goods and services, and it has value because people believe in it. It is not controlled by any government or institution and shares some characteristics with traditional currency, such as divisibility, fungibility, and scarcity. It offers transparency, security, and privacy through its decentralized and cryptographic features. However, its lack of regulation, price volatility, and potential for illicit use differentiate it from traditional currency.

        Reply
        1. Eleanor Graham

          Bitcoin is a digital currency that relies on blockchain technology, allowing users to buy goods and services. Its value is derived from people’s belief in it, and it is not controlled by any government or institution. Bitcoin shares traits with traditional currency such as divisibility, fungibility, and scarcity. Its decentralized and cryptographic features provide transparency, security, and privacy. However, the absence of regulation, fluctuating prices, and the potential for illegal activities distinguish it from traditional currency.

          Reply
  2. Logan Palmer

    Can you please explain in simple terms how bitcoin works and why it is considered similar to traditional currencies? I’m curious to understand the underlying mechanisms and how it compares to the money we use every day.

    Reply
    1. Connor Taylor

      Bitcoin is a digital currency that operates on a decentralized network called blockchain. Transactions are verified by network participants through cryptography and recorded on a public ledger. Like traditional currencies, Bitcoin can be used to buy goods and services. It is considered similar to traditional currencies because it is a medium of exchange, store of value, and unit of account. However, Bitcoin differs in that it is not controlled by any central authority like a government or bank, making it more secure and borderless. The value of Bitcoin fluctuates based on supply and demand, similar to how traditional currencies are traded on the foreign exchange market.

      Reply
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