What is Bitcoin and how does it work?
What is Bitcoin and how does it work? This is a question i’ve seen more frequently, so I thought I’d dive in to explain it!
Cryptocurrency has become popular over the last few years and has even gotten a world of traders around the whole digital currency market. The excitement and buzzing activity around digital currencies today can be credited to bitcoin which was the first cryptocurrency ever to be launched.
Bitcoin was launched in 2009 by an unknown programmer or group of programmers going by the moniker Satoshi Nakamoto as open-source software. It runs on a peer-to-peer network that includes thousands of computers, thus there is no central body with authority over bitcoins.
Despite being in the scene for quite some time and raising a lot of controversy over this period, bitcoin is still confusing to most people.
There are lots of questions about the digital currency, most of which will be answered by the end of this article.
How bitcoins are created
New bitcoins are created through a process known as “mining.”
The process involves a lot of number crunching and the bitcoins are generated as a reward for solving hard math problems.
The miners are always in a race to see who comes up with the solution first and the current reward is 12.5 bitcoins. This reward is halved every 210,000 blocks mined, which translates to every 4 years.
Eventually, the reward will reduce to zero and at this point all the bitcoins will have been mined and brought into circulation.
When all the bitcoins are finally mined, rewards will only come in form of transaction fees. As of now, some 16 million bitcoins have been mined and are in circulation. It is forecast that the last bitcoin will be mined in the year 2140.
Mining is basically a record-keeping service that requires high computer processing power. The work of miners is to keep the blockchain consistent and unchangeable.
They do this by verifying new transactions and bundling them up in blocks. New blocks are linked to previous blocks using a hashing algorithm that links each to the previous, thus forming the blockchain. The computing power used to mine bitcoin is also used to facilitate payments thus is its own payment network.
As you can already guess, bitcoin mining is not easy and miners can take up to 10 minutes on a block.
For a block to be accepted into the network, miners have to provide proof-of-work, which is time-consuming to generate.
The mining process is aptly set that it is more and more difficult to mine bitcoins as you progress. The total number of bitcoins that can ever be mined is also capped at 21 million.
How bitcoins work
When it comes to their application in commerce, you can think of bitcoins as digital gold nuggets:
- They are not regulated by any bank and you can trade them for FIAT currencies or other digital currencies.
- You can also use your store of bitcoins to purchase items online and recently, brick and mortar stores accepting bitcoin are emerging.
- Alternatively, you can store your bitcoins in the hope that they will increase in value in the near future. This has been happening with the early adopters for over 8 years now.
- All transactions done with bitcoins are transparent and safe. Aside from this, a lot of people have warmed up to use of the cryptocurrency since users remain anonymous. Your history of transactions may be available for verification of transactions but your identity is not revealed.
You’ll need a wallet for your bitcoins
A cryptocurrency wallet is a database stored in your computer or any other suitable digital device which allows you to send and receive bitcoins.
Wallets are typically described according to their feature of holding your bitcoins. However, owing to the nature of the system used, bitcoins cannot be separated from the blockchain.
Your software wallet comes with two keys, the public key and the private key. The private key allows your wallet to connect you to the system so that you can trade your bitcoins.
How the value of bitcoin is determined
There is no central bank that decides what the value of a bitcoin is. The price of bitcoins varies constantly and is determined on bitcoin exchanges in similar fashion as the price of stocks and gold is determined through bidding.
You can view the CURRENT value of BTC (Bitcoin) in the widget below!
Why the controversy?
A collection of factors has placed bitcoin as one of the sensational debates on all media fronts.
The first time bitcoin attracted widespread attention is in the period from 2011-2013 when criminal traders bought them in batches of millions in order to keep their money without running into trouble with law enforcement.
The transactions were taking part in the deep web website known as Silk Road. This consequently shot up the price of bitcoins.
Most recently, bitcoin has come under fire as cyber. Criminals are using it for ransom payments. A typical scenario is where the cybercriminal takes hold of your computer using ransomware and asks for payment through bitcoins before they can allow you access to your computer.
The ultimate reason for controversy is the likelihood that bitcoin and other cryptocurrencies could wipe out the banking system as we know it. With cryptocurrency permeating through every sector of industry, banks are finding it harder and harder to make money.This is for a few reasons:
This is for a few reasons:
- Bitcoins completely take the banking system out of the equation and bitcoin accounts cannot be frozen.
- In addition, no middle men are required to move bitcoins as you can send and receive directly.
- The tax man has also been shut out as they cannot examine your bitcoin account for any purposes.
Cryptocurrency has changed the international business landscape
To begin with, using bitcoins is much cheaper and faster than having to depend on banking services to carry out transactions. Using the traditional way of sending money oversees large
transaction would probably take weeks to be processed. However, with bitcoins you can complete such transactions in a matter of minutes, and it doesn’t cost you half as much.
One of the most prominent applications for bitcoins some countries is exchanging FIAT currency and assets into bitcoins to shield them from inflation. In countries like Argentina and Venezuela, people are increasingly converting their assets to bitcoins to protect savings.
Anyway, Bitcoin and other Cryptocurrency are used to purchase all sorts of things from multi-million dollar mansions to everyday online goods. Check out the Palm Beach Confidential Newsletters for monthly Cryptocurrency picks, Stock Picks and more!