How Bitcoins Work

Here's some good steps to follow

Bitcoin is the most famous digital currency that has seriously challenged the conventional currency systems. Following are the steps that will enable anyone to start making transactions in bitcoins:

1. Acquire the digital wallet
2. Fill the wallet with bitcoins
3. Start making online transactions.

Let us see the details of each step:

Acquire the digital wallet

Your first step towards digital currency is to install a software program on your computer or mobile called “digital wallet”. This open-source software is available for free and will generate Bitcoin addresses for you to hold Bitcoin currency. There are three types wallet available online:

Software wallet: This software is installed on your computer.

Mobile wallet: This wallet is available for your mobile.

Web wallet: This wallet is available on the website of the Bitcoin service provider.

Fill the wallet with bitcoins:

The wallet you obtained can contain multiple addresses, and each address can hold Bitcoin balance. You can either purchase Bitcoin balance from Bitcoin currency exchanges such as BitStamp and MT. Gox, or get a service like BitInstant that will enable you to make funds transfers through Bitcoin exchanges and other payment mechanisms.

Start making online transactions:

After you have Bitcoin balance in your wallet, you are set to use Bitcoin for paying online. Remember that Bitcoins is not supported by every online merchant or retailer right now. But most likely in the future, Bitcoin will take over conventional currencies as the most accepted online currency. The company accepting Bitcoin as a payment method will send you a wallet address to transfer Bitcoin balance. The transaction happens in seconds, but the verification process can take as long as 10 minutes or even more in certain cases.

For increased security in Bitcoin currency system, public key encryption is used to protect every transaction. Whenever a new address is generated, an encrypted pair of keys is also created. This pair consists of one public key and one private key, both of which are actually long combinations of numbers and letters.

An example:

This is the breakdown of what will happen when you make a transaction of 10 Bitcoins to a certain company (BitAccept and Co.) that accepts Bitcoins.

The BitAccept and Co. creates a new address in its wallet and sends that to you for transferring balance.

You transfer the amount of 10 Bitcoins from your wallet to the given address. You can remain anonymous when making transactions.

1. The Bitcoin wallet will sign the transaction with your private key for verification and transfer the amount.
2. The transaction will be completed and verified using your public key. After successful verification, the transaction will be complete.

An important thing to consider is that all the Bitcoin transactions are saved permanently on Bitcoin network and anyone can view the transactions. This also means anyone can view the address of your wallet and know the Bitcoin balance contained in that address. Financial experts therefore recommend keeping a separate address for every transaction for enhanced security against illegal activities.