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How Does Bitcoin Work?

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With a return of nearly 480% year to date (as on 15th October 2017), scripting an unbelievable move from levels of sub-USD 1000 a coin to the over USD 5500 currently, there’s hardly a chance you’d have missed noticing the word ‘Bitcoin’ splashed across newspapers, TV channels or the internet. At the same time, a lack of regulations, besides the absence of an even remotely comparable predecessor, has made it difficult wrapping one’s head around comprehending this concept, leave alone understanding its nuances. This post aims to clarify the concept of Bitcoins and their working.

The Basics. The simplest description of a Bitcoin is that it is a virtual or electronic currency having no physical form. Thus, unlike a physical note or coin, as we typically know currency as being, there is no paper form within the Bitcoin system. A bitcoin in essence is a long string of mathematical codes with a monetary value. As an investor or trader in the same, you are mandated to have in place a digital wallet to hold the requisite amount of bitcoin you purchase.

A Bitcoin can be divided out to eight decimal places. So, you can send someone 0.00000001 of a Bitcoin. This smallest denomination is referred to as a Satoshi (a subdivision, quite like what a fil compares to a dirham), named after the yet to be identified creator of the bitcoin, Satoshi Nakamoto.

If there’s no underlying asset to it, where does it get its value from? This question continues to act as a major deterrent in influencing institutional level participation in this instrument. As has been highlighted publicly, there is a lack of clarity around the intrinsic value of a bitcoin. Opponents highlight, that one of the most popular speculative trading recorded, referred to as the Tulip Mania of the 17th century, also had a basic intrinsic value - the price of the tulip bulbs. This eludes the bitcoin. The economic dynamics of demand and supply, instead influence the daily price movement which is highlighted.

Some of the essential terms, you may come across in relation to bitcoins,

  • Blockchain: The main technological innovation, it is a shared database, also understood as a public ledger that records transactions, such as bitcoins. Transactions recorded are confirmed, encrypted and tamper-proof. (To know more, read our post on Blockchain)
  • Mining: It is the process by which transactions distributed within the bitcoin network are verified and stored on the blockchain. This process is competitive and involves solving a series of specialized mathematical problems.
  • Wallets: A bitcoin wallet is the equivalent of a physical wallet or bank account used to store cash. Encrypted with a password it stores valuable information around the bitcoin held within.

It is essential you understand the benefits and costs associated with the card and opt for one which best suits your travel plans. Citibank UAE offers a range of cards to suit your travel – from letting you earn Skywards miles to travel insurance and complimentary stays, these cards cover all of the essentials in ensuring a hassle free trip.

Finally, while opting for a card carries benefits, it is essential you exercise some caution

  • Do not share your PIN with anyone
  • Do not handover the card for use in your absence. Ensure it is swiped in front of you.

By doing so, you can avoid misuse of your card. Keep your card providers’ helpdesk phone numbers handy in the case of an emergency. CitiPhone Banking Services offer you a 24 hour service on +971 4 311 4000 to help address any emergency.

Content exclusive to Citi by Wealth Monitor. The views expressed here are those of the authors and do not necessarily represent or reflect the views of Citibank UAE.