The road to financial independence is not a simple one. Lisa Smith, writing for Investopedia, outline the issues and dilemmas we face on that journey in the following article. With over 20 years as a financial writer, Ms. Smith offers a very clear analysis of the pitfalls that can slow or even divert us on our way to financial freedom. FFN Editors
Two Roads: Debt Or Financial Independence?
- Get a job
- Start to save
- Get raises
- Save as salary increases
- Take advantage of dollar-cost averaging (DCA)
- Benefit from a bull market
- Hit magic number
It sounds simple and straightforward on paper, but in reality, earning a high income does not automatically translate into a high net worth. This article will explain why.
Income and Expenses
When most people are starting out, they rent a small apartment. Getting married or setting up a living arrangement with a significant other generally results in a higher income, but it is also likely to lead to the desire for more space – often at the cost of the desire to make maximum contributions to a pair of individual retirement accounts (IRAs) or 401(k) plans. Unfortunately,there are many things that people may not know about an IRA, and the opportunity to increase savings often takes a back seat as living accommodations are upgraded to a single family home.
After a decision is made to have children, buying a minivan, paying for clothes, toys, soccer, hockey, ballet, and other associated costs results in an increased outlay of cash, not only eliminating the ability to save more, but potentially resulting in a diminished savings rate. Having children can also result in moving to a larger home in a better school district and,the decision to pay for tuition at a private school, and then maybe even a college education. All of these things start to take precedent over funding your own retirement savings.
Lifestyle decisions can also have negative impacts on savings rates, even as income increases. Scrimping and saving simply isn’t fun. If we can afford to take a luxurious vacation, buy that sports car, upgrade the wardrobe, spend a weekend at the spa, buy that place at the beach or chalet in the mountains, don’t we deserve it for all the hard work we have done?
The desire to spend instead of save is also fostered by a quick look at the shenanigans on Wall Street and the poor investment returns in our portfolios. Anybody holding Enron, Worldcom or dozens of other failed firms in their portfolio aren’t likely to be singing the praises of savings. A look at most investment statements during a bear market also serves as a reminder that a 20% loss is not recovered by a 20% gain. If we’re going to be cheated by the firms we invest in and watch our portfolios decline in value even when we diversify, it’s easy to justify the purchase of something we will at least be able to enjoy in exchange for our money.
Geography can also work against the ability to save. In Silicon Valley, a modest ranch house can sell for $500,000. In New York City, private school tuition for three children can reach six figures and mortgage payments of $150,000 per year are not uncommon. Moving up in the world also places one in a different position on the socioeconomic scale.
If you are living the upscale lifestyle of an investment banker to the rich and famous, driving to a client meeting in a Ford Focus is out of the question. Similarly, if everyone in your social network has a housekeeper and vacations in the Hamptons, those items become an expected part of the lifestyle in order to maintain your social network and class. That correlation between standard of living vs. quality of life is very common.
The Eye of the Beholder
Although it might sound extravagant to those of us earning the national median of around $50,000 (according to Census Bureau figures), having more money (even much more money), doesn’t always put people farther ahead. In fact, those earning more almost always have a lifestyle that leaves them with more things to pay for. That said, before class envy takes hold, those of us at the lower end are also not skipping our lattes, nights on the town, cable television, cell phones, cigarettes, alcohol, new cars, and other nice-to-have-but not-strictly-necessary expenses.
In the end, everybody wants whatever they can afford, and instant gratification is a whole lot more fun than watching a quarterly brokerage statement for 20 years or more. As a result, most of us end up financing our lifestyles with debt. And many are worried that standard of living vs. quality of life is very common.
The Bottom Line
Sticking to the seemingly simple plan of earning more and saving more requires serious discipline and sacrifice. It means living below your means, regardless of the level of your means, and making savings a priority. If requires having a plan, saving and maximizing the amount you invest in our 401(k) and other savings vehicles before spending on the extras. It may not sound like fun, but years from now, when you look back at all the people who seemed to have it all but were really just getting by, you’ll be one of the ones laughing all the way to the bank
Michael Yardney, a director with Metropole Property Strategists, offers property advice and advocacy to his clients. In this featured article, Mr. Yardney gives us an interesting analysis of how the wealthy tend to make their money.
As you will see, the wealthy do some things very differently from the rest of the population that helps to increase their wealth. Geared towards property investing specifically, Michael explains these differences in this edition of Financial Freedom News. FFN Editors
Why property investors develop financial freedom
Friday, 06 September 2013 08:19
How did they do it? How can we do it too?
The truth is wealthy people don’t do different things; they just do things in a different way – from the way they think to the actions they take.
I’ll let you in on a little secret – not everybody has to work hard for their money.
People who own businesses have employees who are willing to work for money, whereas the business owner generally has his money working for him. The same is true for investors, their money works for them.
It’s called passive income. Being a property investor or a business owner is like owning the proverbial money tree – you control something that makes money for you, without the need to even be there.
In his Rich Dad, Poor Dad series of books, Robert Kiyosaki explains how the rich differ from the poor. It’s not just because they have more money. The main difference is how they think about and interact with their money and that when it comes to how people make money, we can all be placed in one of four categories.
1. The employed – have a job
Employees trade hours for dollars; however, what they really get are leftovers – after the government takes its share in taxes.
“So what? They do that to everyone!” you may be thinking.
Well no, they don’t. Business owners and investors only pay tax on what’s left over after their bills are paid.
Wouldn’t it be nice to only have to pay tax on what you don’t spend?
2. The self-employed – own a job
Self-employed people and professionals usually want to be their own boss. They’re prepared to work hard, but often what they’ve done is swap one boss for hundreds of bosses – customers or clients.
In reality, self-employed people aren’t business owners – they still work for their money, but they’re somewhat better off than employed people because they’re able to take advantage of tax deductions that allow them to pay their business expenses before being taxed on what’s left over.
3. The business owner – owns a system and people work for them
The true business owner not only doesn’t have to work, he doesn’t have to be at work every day, because he has a system and people to do it all for him, and possibly even supervisors to manage his workers.
The true business owner asks, “Why do it yourself when you can employ someone to do it for you?”
After initially investing in a business idea, and a business system, they let the money they have invested – which is now in the form of a business – work for them.
4. The investor – money works for them
Investors don’t have to work either, because their money works for them.
If you hope to become rich at some point, you have to belong to this group; because investors convert money into wealth.
Obviously, you’re not going to jump from being an employee to a full-time investor overnight. But you can start taking the steps to move from being an employee or self-employed, by building your own property portfolio.
Done correctly, income-earning residential real estate can be your vehicle for getting out of the rat race!
There are also many legal tax advantages available to investors. One of the reasons the rich get richer is that in some cases, they make millions and legally pay very little tax. That’s because they build their assets, not their income and make their money as investors, not workers.
Imagine you own investment properties worth $1 million that increases in value by 8% each year. In 12 months your asset base will have increased by $80,000, yet no tax is payable on this. Wealthy property investors can borrow against the increased value of their assets and use the money to reinvest or live off.
Where do you stand?
Which category do you fit in? Are you an employee, self-employed, a business owner or an investor?
In the past there has been a slow but steady transfer of wealth from employees and self-employed to business owners and investors. They’re all playing the same game, but each group is playing with a different set of rules and their mindsets are poles apart.
Employees and the self-employed work harder and harder, trying to build cashflow, yet many dig themselves deeper into a hole of consumer debt.
In the meantime, business owners and investors slowly build up their assets. The employed and self-employed pay the most tax, while business owners and investors take advantage of legal tax loopholes.
Logically, if you want to become wealthy you are going to have to become either a business owner or an investor. It’s just too hard to become rich as an employee or self-employed worker.
Does that mean you should give up your day job?
Not necessarily. Many employees have become very successful investors – in particular, property investors.
So rather than relinquish your job, I suggest you start educating yourself with the aim of becoming a property investor – initially in your spare time and then maybe, if you choose, on a full-time basis.
Should you become a business owner?
Most small businesses fail in the first five years.
In general, I think the opportunity to become rich through successful property investment is much easier for the average Australian. That’s why I recommend you seriously consider making your fortune as an educated, financially fluent real estate investor who treats their property like a business.
(Michael Yardney is a director of Metropole Property Strategists, who create wealth for their clients through independent, unbiased property advice and advocacy. Subscribe to his Property Update blog).
Let us know your thoughts regarding this information in the Reply section below. Also, please click “Like” and “Share” us with others who may be interested in achieving financial freedom.
(Disclaimer: The views expressed in this article are strictly those of the author. They do not necessarily represent those of FFN. Please use due diligence prior to applying the concepts and recommendations and/or in purchasing products or services from the author.) FFN Editors
Our featured article in this edition of Financial Freedom News recommends a very different approach to the idea of planning for retirement. Richard Eisenberg, a contributing writer for Forbes magazine, recommends that we focus on attaining financial independence instead of planning for retirement. In this two-part article Richard outlines his views on how to make this goal a reality.
In this article, we are given the 5 rules for declaring our financial independence. The second part of this article, in our next edition, will discuss several types of retirement calculators and their role in the planning process. FFN Editors
Plan For Financial Independence, Not Retirement
Richard Eisenberg, Contributor to Forbes Magazine Personal Finance Section (www.forbes.com)
Declaring your Financial Independence Day is a better idea than trying to come up with “the number” you need to retire, especially if you’re in your 50s or 60s and don’t have much time to pump up your savings.
What exactly is financial independence or, as some call it, financial freedom? That depends on your own definition.
In a new Capital One 360 survey, 44% of U.S. adults said financial freedom meant not having any debt, 26% said it meant having enough saved for emergencies and 10% defined it as being able to retire early.
I go with Jonathan Chevreau, the Toronto-based author of the new U.S. edition of Findependence Day, a “fictional finance” book, and creator of the Findependenceday.com site. His novel is about a young debt-ridden couple, Jamie and Sheena Morelli, and their road to reaching you know what.
Chevreau says that when you’re financially independent, you work because you want to, not because you have to. “Findependence is necessary for retirement,” he says. “You can be findependent and not retired, but you can’t be retired without being findependent.”
Chevreau targeted April 6, 2013 – his 60th birthday – as his Findependence Day and reached that goal, but he still edits Canada’s MoneySense magazine. “I have a job I like, so why would I quit?” he asks.
5 Rules to Declare Your Findependence
Chevreau’s five rules for achieving findependence:
1. Pay off your home in full. “That’s really the foundation,” he says.
2. Find multiple sources of income for retirement. These can include interest and dividends from your investment portfolio; rental real estate; freelance or consulting work; Social Security; an annuity; and perhaps a guaranteed pension.
3. Develop “guerrilla frugality” habits. Chevreau calls this “becoming a Frooger.” Keeping expenses low while working full-time will make it easy to live that way in retirement and reduce the amount of savings you’ll need for a comfortable retirement.
“If you spend like a millionaire, you’ll end up a pauper,” says his book’s protagonist, Jamie. “Spend like a pauper and you have a shot of becoming a millionaire.”
4. Save 20% of your gross income. This will be impossible for many people, but not for others. If you can’t save 20%, try for 15 or 10%.
5. Invest with a “Lazy ETF” portfolio. That means selecting, say, three exchange traded funds– a U.S. stock fund, an international stock fund and a U.S. bond fund – and holding onto them.
Review their performance once a year. Then rebalance your portfolio if the markets shift and you discover you have a higher percentage in one of these asset classes than you want. (Use index funds instead of ETFs, if you prefer.)
Women, Men and Money
At the risk of overgeneralizing, I think many women gravitate toward the concept of financial independence, while men often prefer focusing on “the number.”
In the initial episode of the two-part Consuelo Mack WealthTrack public television series on Women, Investing and Retirement that premiered June 28, Jewelle Bickford, senior strategist for GenSpring Family Offices, said the first question her male clients ask in their monthly or quarterly meeting is “how has their portfolio done, whereas the women tend to think: ‘Will I have enough?’”
(This ends part 1 of this article. Part 2 will follow in our next post). FFN Editors
Let us know your thoughts iregarding this nformation in the Reply Section below. Also, please click “Like” and “Share” this artilcle with others who may be interested in achieving financial freedom.
(Disclaimer: The views in the above article are strictly those of the author. They do no necessarily represent those of FFN. Please use due diligence prior to applying the concepts, recommendations and/or in purchasing any products or services offered by the author). FFN Editors
Here are 10 forex trading tips from investing guru Vince Stanzione of 50WallStreet.net. Vince suggests an approach for taking advantage of the huge forex (i.e. Foreign Exchange) market that does not follow the suggestions commonly cited in the media. Instead, he uses an approach that is more like investing by using longer time frames. This is different from trading the forex market in a more short-term, day trading style.
Let us know what you think of this information in the Comment section below. And, please “Like” and “Share” this information with others who may be interested in achieving financial freedom. FFN Editors
(Disclaimer: The views expressed in the above video are strictly those of the presenter and their sponsor(s). They do not necessarily represent those of FFN. Please use due diligence in applying the concepts, recommendations and/or in the purchase of products or services offered by the presenter). FFN Editors
When investing in the financial markets, managing risk is a critical factor. How to accomplish this is a widely debated topic. Our featured presentation from the Wealth Directions Channel (http://GetWealthDirection.com), offers an approach which uses stock options as a vehicle for risk reduction in investing.
Options use for the average investor gets mixed reviews. Some swear by it, others feel it’s too complicated and therefore unacceptable for the average investor’s needs. However, the presenter asserts that stock options need not be that difficult. He suggests a 3 step process to make options a viable tool in the financial freedom seekers arsenal.
Let us know your thoughts in the Comments section at the end of this page. Also, please “Like” and “Share” this information with others who are interested in achieving financial freedom. FFN Editors
(Disclaimer: The views expressed in the above video are strictly those of the presenter. They do not necessarily represent those of FFN. Please use due diligence prior to applying any of the concepts, recommendations and/or in purchasing products or services from the presenter). FFN Editors
Whether you are an active or passive investor, here are a set of critical decision steps to take prior to putting your hard-earned cash into the financial markets. Offered by the Sorted Financial Money Guide, these are fundamental considerations that should be clearly determined by any prudent investor.
Let us know your thoughts about this information in the Comments section below. FFN Editors
“Top tips for investing”
Source: SORTED…Your Independent Money Guide (www.sorted.org.nz)
Before you leap into any investment decision, there are some important rules you should follow:
Set your goals: Decide what it is that you are trying to achieve. Where do want to be at some point in the future? What is the final outcome that you want from your investments and what is your timeframe? Think about debt – is investing the right option for you right now? Would you be better off using your money to pay off high-interest debt (e.g. credit card, hire purchase), or to reduce your mortgage?
Know your risk profile: You need to know what type of investor you are – essentially, how much money are you willing to lose? How much volatility (ups and downs) can you tolerate? To work out your investor type, use our investment planner.
Know how you want to invest your money: What mix of investments suits your investor type? Bonds, shares, property, bank deposits? Will you invest directly yourself or use managed funds? Our investment planner can help here too.
Do your homework: Research, compare and contrast everything – or get someone to do that for you. Read the business sections of the newspaper, go online, talk to your adviser, bank manager, or accountant. We suggest you also read any documents, such as the investment statement and/or prospectus, relating to the investment you are considering.
Research different companies’ investment options: If you are going to invest directly in a company, find out which companies suit your type. Do they offer the kind of investments you are after? What are the rates of return for each investment? What is the level of risk associated with the return?
Research the companies themselves: What does the company do? What markets is the company in? Who is running the company? Have they ever been declared bankrupt? How is the company run? Does the board have independent directors? How has the company performed in recent years – is there a steady performance over time?
Get the right advice: Shop around for an Authorised Financial Adviser (AFA) who you have confidence in. Authorised Financial Advisers must tell you (in a written disclosure statement) how they are paid and the impact that can have on the advice they give you. Find out more about getting investment advice.
Spread your risk: As the saying goes, don’t put all your eggs in one basket. Spread your risk around different options and different companies. For example, if you are considering high-risk investments, you can balance your risk with other investments in lower risk areas, like bank deposits or cash and bonds.
(Disclaimer: The views expressed in the above article are strictly those of the author. They do not necessarily represent those of FFN. Please use due diligence prior to applying the concepts, recommendations and/or in purchasing any products or services from the author). FFN Editors
You have probably heard of bitcoins. They are mentioned quite often in the media lately. But, you may not be sure what this so-called new form of currency actually is. So, we are featuring an article from the Investopedia staff published in Forbes magazine that does an excellent job of explaining the nature and use of bitcoins.
Let us know your thoughts about this information in the Comments section at the end of the page. Also, please “Like” and “Share” this information with others who may be interested. FNN Editors
“How Bitcoin Works”
By Investopedia Staff originally in Forbes magazine
Bitcoin is a digital currency that exists almost wholly in the virtual realm, unlike physical currencies like dollars and euros. A growing number of proponents support its use as an alternative currency that can pay for goods and services much like conventional currencies. Bitcoin is the first and easily the most popular cryptocurrency, or currency that uses cryptography1 (see “Definitions and Key Concepts” at end of article) to control its creation, administration and security.
Bitcoin was set up in 2009 by a mysterious individual or group with the pseudonym Satoshi Nakamoto, whose true identity is yet to be revealed and who left the project in 2010. It rocketed to prominence in 2013, when the value of a Bitcoin soared more than 10-fold in a two-month period, from $22 in February to a record $266 in April. At its peak, based on more than 10 million bitcoins issued, the cryptocurrency boasted a market value of over $2 billion.
Bitcoin Versus Conventional Currencies
Bitcoin differs from conventional currencies in some very fundamental ways, as noted below (for the sake of simplicity, we use the U.S. dollar as a proxy for conventional currencies).
•Bitcoin uses P2P technology without a central authority: Bitcoin is a decentralized currency managed by peer-to-peer technology (P2P2), without a central authority. All functions such as Bitcoin issuance, transaction processing and verification are carried out collectively by the network, without a central supervisor or agency to oversee operations. In contrast, a conventional currency is issued by a central bank as part of its mandate to manage national monetary policy. In the U.S., only the Federal Reserve has the power to issue dollars; it is also the central authority that conducts monetary policy, supervises banks, maintains financial system stability, and provides financial services to depository institutions.
•Bitcoin is primarily digital: Although physical Bitcoins are available from companies such as Casascius and BitBills, Bitcoin has been designed primarily to be a digital currency. Physical Bitcoins are somewhat of a novelty, and the very idea of a tangible form defeats the purpose of a digital currency, according to the most ardent supporters of the concept. Conversely, your dollars exist primarily in physical form; the balances that you hold at your bank and online brokerage can be converted into physical dollars within minutes if you so desire.
•Bitcoin has a maximum 21 million limit: The total number of Bitcoins that will be issued is capped at 21 million. The Bitcoin “mining”3 process presently creates 25 Bitcoins every 10 minutes (the number created will be halved every four years), so that limit will not be reached until the year 2140. While Bitcoin critics argue that the maximum limit is not large enough, supporters maintain that since each Bitcoin is divisible to eight decimal places, the number of fractional Bitcoins (called “satoshis”) – at 21 x 1014 – will be more than enough for all conceivable applications. Conventional currencies, on the other hand, can be issued without limit.
•Bitcoin is a complex product: The concepts of cryptocurrencies in general are abstruse and abstract, and understanding how and why Bitcoin works requires a fair degree of technological knowledge.
•Bitcoin has limited acceptance: It has limited acceptance so far and cannot be used at many brick-and-mortar storefronts, although that may eventually change if it continues to gain traction. The dollar, on the other hand, has near-universal acceptance as the world’s global reserve currency.
•Bitcoin transactions have limitations: A Bitcoin transaction can take as long as 10 minutes to confirm. Transactions are also irreversible and can only be refunded by the Bitcoin recipient. These limitations do not exist with conventional currencies, where debit and credit transactions are confirmed within seconds; certain transactions can also be reversed for valid reasons by the originator, without having to rely on the recipient’s largesse.
•Bitcoin balances are not insured: This means that if you lose your Bitcoins for any reason – for example, your hard drive crashes, or a hacker steals the digital wallet in which your Bitcoins are stored, or the Bitcoin exchange where you held a balance went out of business – you have little recourse. Currency balances held at banks, on the other hand, are insured against certain events such as bank failure by agencies like the Federal Deposit Insurance Corporation in the U.S.
How Bitcoin Works
Let’s say you want to test the Bitcoin waters. The first thing you need to do as a new user is install a digital wallet on your computer or mobile device. This wallet is simply a free, open-source software program that will generate your first and subsequent Bitcoin addresses. There are three types of wallets – a software wallet (installed on your computer), a mobile wallet (which resides on your mobile device) or a Web wallet (located on the website of a service provider that hosts bitcoins).
Bitcoin uses public key encryption4 techniques for security. This means that when a new Bitcoin address is created, a cryptographic key pair consisting of a public key and private key – which are essentially unique, long strings of letters and numbers – is generated.
Each address has its own Bitcoins balance, so all you need to do is acquire a number of Bitcoins that will be held at one of the addresses in your wallet. You can acquire Bitcoins through a number of ways – by buying them from a Bitcoin currency exchange such as Mt. Gox or Bitstamp, or through a service like BitInstant that enables fund transfers between Bitcoin exchanges and supports various payment mechanisms.
Note that all Bitcoin transactions are stored publicly and permanently on the Bitcoin network, which means that the balance and transactions of any Bitcoin address are visible to anyone. Experts therefore recommend that Bitcoin owners create a new address for each transaction as a means of ensuring privacy and enhancing security.
Once you have created a Bitcoin address and have acquired Bitcoins, you can use them for an online transaction with a company that accepts Bitcoins as a payment mode. The company will send you the Bitcoin address to which you can send your Bitcoin payment. You direct the payment to that address; while the transaction takes place within seconds, verification can take 10 minutes or longer.
All Bitcoin transactions, without exception, are included in a shared public transaction log known as a “block chain”. This is to confirm that the party spending the Bitcoins really owns them, and also to prevent fraud and double-spending.
Why does transaction verification or confirmation take so long? Because the complex algorithms involved in Bitcoin mining (see description below) take time to solve, even with immense computing power at one’s disposal.
An Example of a Bitcoin Transaction
Let’s assume you want to make an online payment to a company – call it BitChamp – using 5 Bitcoins that you have in an address in your digital wallet. Here are the steps in the transaction:
1.BitChamp creates a new Bitcoin address and directs you to send your payment to it. This creates a private key (known only to BitChamp) and a public key (available to you and anyone else). Note that just as a seller does not need to know your physical identity if you pay cash, you do not need to disclose your real identity to BitChamp and can remain anonymous.
2.You instruct your Bitcoin client (the free Bitcoin software you first installed on your computer) to transfer 5 Bitcoins from your wallet to the BitChamp address. This is the transaction message.
3.Your Bitcoin client will electronically “sign” the transaction request with the private key of the address from where you are transferring the Bitcoins. Recall that your public key is available to anyone for signature verification.
4.Your transaction is broadcast to the Bitcoin network and will be verified in a few minutes. The 5 Bitcoins have been successfully transferred from your address to the BitChamp address.
Note that only the first two steps involve action by the seller and you respectively. The latter two steps are automatically executed by the Bitcoin client software and Bitcoin network. As well, storing the private key attached to an address safely and securely is of the utmost importance; otherwise, anyone who obtains the private key can control the Bitcoins at that address and use them fraudulently.
Bitcoin Pros and Cons
Bitcoin has a number of advantages:
•As the first cryptocurrency to capture the public imagination, Bitcoin has “first mover” advantage and a head start over the competition.
•Total issuance is limited to 21 million, so it is unlikely to be devalued because of the prospect of a massive influx of new bitcoins.
•As a decentralized currency, Bitcoin is free from government interference and manipulation.
•Transaction costs are much lower than with conventional currencies.
On the flip side, Bitcoin’s disadvantages include:•The price of a Bitcoin has been increasingly volatile, making it difficult to assess its real value and increasing the risk of losses for investors in the cryptocurrency.
•The relative anonymity of Bitcoin may encourage its use for illegal and illicit activities such as tax evasion, weapons procurement, gambling and circumvention of currency controls.
•The fact that bitcoins exist primarily in digital form renders them vulnerable to loss.
Bitcoin has made significant progress in its adoption and usage since it was unveiled in 2009. Its evolution over the next few years will determine whether this leading cryptocurrency will become an integral part of the global financial system, or whether it is destined to remain a niche player.
Definitions and Key Concepts
1 Cryptography refers to the practice and technique of using encryption for secure communication and transmission of data and information.
2 In a P2P network, a group of computers is connected to enable the sharing of resources and information by users, and there is no central location for the network. This is diametrically opposed to a typical client-server network, where the central server controls the level of access by users to shared network resources. Popular applications of the P2P concept are Skype and file-sharing services such as BitTorrent.
3 Bitcoin mining refers to the computationally-intensive task of generating Bitcoins. While any computer can be put to the task of Bitcoin mining by using a free mining application, in reality a great deal of computing power is required to solve the extremely complex algorithms involved and to share those solutions with the entire Bitcoin network. The mining process is quite complicated and involves advanced concepts such as cryptographic hashes and nonces.
In simple terms, Bitcoin miners use powerful computers to track and compile pending Bitcoin transactions every 10 minutes into a new block. These miners then set to work doing the intensive number-crunching required to verify all the transactions in the block. This is a competitive process, and the first miner to solve the algorithms and verify the transactions transmits the results to the entire Bitcoin network.
Upon confirmation by the rest of the network, the block is then added to the block chain. Each block includes a certain number of Bitcoins in a “coinbase” transaction that is paid out to the successful miner. This reward was set at 50 Bitcoins when the system first commenced operations in 2009, but was halved to 25 Bitcoins in November 2012, and will reduce by 50% approximately every four years.
4 Public key encryption combines a public key and a private key. While the public key is available to anyone, the matching private key is stored securely in the digital wallet and is generally password-protected. Each Bitcoin transaction is signed by the private key of the initiating user, providing mathematical proof that it has indeed originated from the owner of the address, and preventing the transaction from being altered once it has been issued. Since the key pair is mathematically related, any data or information encrypted with a private key may only be decrypted or deciphered with the corresponding public key and vice versa.
5 Double-spending means spending the same digital currency twice, something that is impossible with physical currencies.
(Disclaimer: The views in the above article are stictly those of the author. They do now necessarily represent those of FFN. Please use du diligence prior to applying the concepts, recommendations and/or in purchasing any productsor services from the author.) FFN Editors