How Bitcoin works? A simple introduction.
Bitcoin is an open source digital currency which could be transferred in a P2P payment network. It is decentralized and it is not controlled by any central authority or banks. It is transferred from person to person and no authority will be aware of your transaction. Its quite different from PayPal or Banks.
How PayPal or Banks operate:
Banks deal with real currency whereas PayPal uses digital currency but still work more alike. They act as central authority maintaining ledger or transaction details of both sender and receiver. When you send a payment to a receiver, the amount will be debited from yours and credit in the receivers account. The balance amount is the value you own at the end of the day. It is the model which we are well aware of.
How Bitcoin works:
Bitcoin is not controlled by central authority. It is just a digital file. Every system in the Bitcoin network will maintain the transaction details of all the users. It will be a public ledger. Bitcoin is a value, where it will not maintain any balance of a particular account, whereas it will maintain list of transactions and the cumulative credit transaction minus debit transactions will be your balance.
You need to install Bitcoin wallet software which will help you to generate Bitcoin address. It is nothing but a public key and your friends could transfer money to this address. The entire concept is based on Cryptography.
Consider Alice is sending money to Bob, the digital signature of the transaction message will be created using Alice private key and it will send to the Bitcoin network. Each node in the network will authenticate the transaction and update its ledger.
How Bitcoin is generated:
You could purchase from Bitcoin exchange or you could exchange (buy or sell) from this exchange near you. If you receive Bitcoins from someone as a return for your service then you could transact it to these exchanges.
You could be part of the Bitcoin network and by solving the bitcoin transaction, you could earn some bitcoins as reward. There are Bitcoin mining software and you could use it to participate in the network.
Bitcoin price is volatile, it may increase or decrease over a short period of time. It is not recommended to keep the bitcoins for long term. If you receive any coins just encash it at the earliest. The transactions are irreversible, so be sure to whom you are transferring the funds. Since there is no central authority involved, you cannot claim anything. It can only be refunded by the person receiving the funds.
Bitcoin is very different than PayPal or Banks. It is growing and many have started using it.
Open source Bitcoin mining application
Open source Bitcoin wallet