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If you have tried shopping online or playing online games, then you most probably have transacted using Bitcoin. In this article, I will tell you all that you need to know about Bitcoin and how this online currency changed the face of economic transactions.
What Is Bitcoin?
Simply put, Bitcoin is a decentralized digital currency that enables real-time peer-to-peer payments to anyone in the world without the intermediation of a central authority. Instead of a central bank monitoring and supervising transactions, Bitcoin is managed and issued collectively by the network. Bitcoin is often referred to as a cryptocurrency, primarily because on top of being decentralized, it also uses cryptography to prevent double-spending.
Origins of Bitcoin
Bitcoin was a breakthrough in the world of online transactions. As a matter of fact, Bitcoin is the first cryptocurrency ever created. Putting together existing technologies and utilizing recognized concepts, particularly those from the cyberphunk community and those used in cyberphunk mailing lists, Satoshi Nakamoto posted a paper on the Bitcoin protocol in 2008. In 2009, the first open source Bitcoin client was released and the first bitcoin was issued—the Bitcoin network officially came into existence.
In 2010, Satoshi Nakamoto left the Bitcoin project. But this does not mean that the project ground to a halt. As a matter of fact, since then, more developers started working on the Bitcoin and the community grew exponentially.
How Is Bitcoin Generated
Like paper currency, Bitcoin has value only insofar as the creation of coins is limited. A new bitcoin is mined into existence by following a mutually agreed-upon set of rules. Often unknown to the user, a person mining a bitcoin is actually running a software program that is continuously searching for the solution to a complex math problem. The difficulty of this problem is regularly adjusted to ensure that the number of solutions found globally is constant for any given time. Before, a block (a package of solutions and other information that can be shared with other individuals) can mine six bitcoins in an hour. At present, the number of new bitcoins produced in a block has increased to 25.
The computation and the search for solution is a continuous process—primarily because not only is there an incentive for doing the computational work to create new blocks, but also because the number of bitcoins that can be mined in a block is decreased by half roughly every four years. As a matter of fact, the original block reward was 50. It has decreased by 50% since.
How Does Bitcoin Work
The Bitcoin network shares a public ledger called the “block chain”. It contains all transactions and allows the user’s computer to verify the validity of each transaction. Aside from the records in the ledger, each transaction is also protected by digital signatures that ensure its authenticity. These digital signatures are tied to the sending addresses and allow the user to verify the validity of each transaction. This elaborate system allows users to have control over sending bitcoins from their own Bitcoin addresses.
For most Bitcoin users, however, the process is less complicated. Payments are easy to make—easier than debit or credit card payments, as a matter of fact—and can be received without a merchant account. Users can readily download a wallet application, and can at once start making payments using a computer or a smartphone. All a user has to do is to enter the recipient’s address, the payment amount, and press send. On top of this, recent technology has made the whole payment process even simpler and more convenient. Now, instead of typing the recipient’s address, an individual wishing to make a payment can just scan a QR code or touch his/her phone with another phone to obtain the address. This mode of data entry utilizes NFC technology and is a feature available in many different wallets.
Advantages of Bitcoin
The advantages of this technology include the following:
- Convenience in payment. No need to go to the banks and to spend time falling in line. Users can make payments anytime, anywhere and to anyone in the world.
- Very low fees. Bitcoin payments, at present, are processed with minimal to no fees. Unlike traditional banks, users no longer have to shed a good amount of money in fees, especially in overseas transactions.
- Lower risks for merchants. The supply of this online currency is out there for everyone to verify and use real-time. Transactions are also secure, irreversible, and do not require any sensitive data from the users. It allows merchants to protect themselves from fraudulent transactions and leave markets with unacceptably high risks or fraud incidence.
Disadvantages of Bitcoin
Like any technology, this innovative online currency, of course, also suffers from certain drawbacks. The most pressing are the following:
- Universality. Unlike credit card payments or bank transfers, bitcoin payment has yet to become the widely-preferred method of online payment and transaction. At present, many people are still either unaware or inadequately informed about this mode of payment. A user may still find him/herself in search of companies or merchants accepting this kind of payment.
- Volatility. Since the number of bitcoins in circulation is still relatively small, even small business events or occurrences can easily affect price. Developers, however, assure that volatility will decrease over time as the number of currency in circulation increases and as the market matures.
- Ongoing development. This technology has yet to fully mature. A number of its features are still incomplete and are in continuous development and testing. Also, since the market is rather new, most businesses involved in it still does not offer insurance. Some are, on the other hand, still getting ready to be released to the public.
While an accurate figure might be difficult to come up with, as of September 2011, the estimated number of bitcoin users is at 60, 000 and still increasing as the technology gets more developed and as it gains more popularity, especially among internet users.
Although this technology has matured considerably since its creation in 2008, it has yet to be developed so as to prevent large fluctuations in its value and to establish its usefulness as a currency. At the same time, it also has to confront the regulatory issues it is being presented at present.
Indeed, the bitcoin technology has come a long way since its creation. While not entirely free from controversy, it has great potential and in constant testing and development from developers eager to come up with new ways to transact online.
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