Bitcoin has been making headlines recently. Famous social media accounts tried to fool Twitter users into passing over Bitcoin. The number of bitcoins that can exist is limited, and only 21 million exist, which should be reached by 2140. Digital currency like Bitcoin may seem familiar but it isn’t quite as clear as it seems. How does Bitcoin mining work? How would we use money in the future? And can we trust cryptocurrencies? If you’ve come across Bitcoin before and are wondering what it is and who created it, continue to read on!
What is Bitcoin?
Bitcoin is a digital currency that can be transmitted securely between users around the world instantly. It is digital cash, just like how you send Bitcoin to somebody who accepts it. Bitcoin essentially doesn’t exist in the real world as it is a digital form of currency as opposed to traditional currencies. It was started as open source software in 2009 and anyone can look into its code and contribute. No banks or government authority controls Bitcoin’s supply, Bitcoin is decentralized.
How Bitcoin Works
There is no central authority in Bitcoin. Public-key cryptography and proof-of-work are both used to verify the transactions. Addresses transfer bitcoins amongst one another and a user can have several addresses.
The network broadcasts each transaction to its network and then the Bitcoin blockchain adds each transaction, ensuring that bitcoins cannot be transacted twice. An hour or two later, the block is mined every 10 minutes and transactions are locked into place.
Bitcoin’s supply is different to a central bank’s traditional currency supply because the supply is controlled by the blockchain. There are strictly 21 million bitcoins that will ever exist, with around 17.3 million in circulation.
Bitcoin is divisible to very small amounts, so the transfers are possible as small as 0.00000001 bitcoins, so the 21 million limit isn’t so limiting.
How Does Bitcoin Solve the Double-Spending Problem?
In order to prevent double spending, bitcoin uses blockchain, mining and proof of work. All these elements make it very difficult to alter the transaction ledger. Bitcoin users wait for confirmations when they will be getting paid. Each extra confirmation helps to increase the irreversibility of the transaction. While systems such as PayPal use an authority central to the process of verification to accept a transaction, Bitcoin relies on its decentralised system to stop double spending.
How Is Bitcoin Decentralized?
It is decentralized simply because it does not rely on any central authority. It uses a network of nodes following the same protocol running a Proof-of-Work system in order to determine the ownership of the network. Bitcoin differs from centralized systems on this matter.
Keeping your private key secure and once your transaction is confirmed, no one will be able to steal your Bitcoin. The cryptography secures the possession of Bitcoin, not business rules.
Because Bitcoin transactions are final, merchants don’t need extra information like billing addresses or names. Transactions are anonymous, the users aren’t required to register their real name or provide other personal details such as age or nationality.
Others argue that Bitcoin currency can be used by criminals because its payments aren’t traceable, and are sent with no limit like bank accounts. Still, their claims are weak as all transactions are public on the blockchain and can be traced by authorities. In fact, US dollars are preferred by criminals for illicit use more than Bitcoin.
What is Bitcoin Mining?
The mining of Bitcoin is a process that uses computational power to secure Bitcoin transactions as well as add new bitcoins to the system. Bitcoin mining is what happens when companies and users consume computational power, secure Bitcoin transactions and get new Bitcoin added to the system. To confirm transactions and make sure they weren’t double spent, anyone could mine by solving math problems. The reward for the miners is in the form of fresh bitcoins, 12.5 per block. The amount of reward will go down over time and go to 21 million bitcoins. The job of mining demands huge resources, and is mostly handled by farms using specialized gear, so hobbyists can’t take part.
Who Created Bitcoin?
Bitcoin’s creator is unknown, but it was introduced by Satoshi Nakamoto in 2008, a pseudonym that may represent a group or a single person. Bitcoin was meant to be the enemy of inflation and the protector of savings from the forces of government. Bitcoin is used to preserve wealth in countries with high levels of inflation, such as Venezuela and Zimbabwe. Before Bitcoin, Cryptographic methods and blockchain technology were pioneered by Tim May, Stuart Haber, W. Scott Stornetta, and others.
Why Does Bitcoin Have Value?
The reason that Bitcoin has value is because it’s a new technology like the internet or alternating current but not fully understood yet by many. Its supply is limited to 21 million, making it scarce and secure. Unlike gold, Bitcoin can easily be stored, transported, and used worldwide without relying on banks or third parties. This decentralization reduces risks like account freezes and data hacks. Bitcoin also provides a transparent, predictable monetary policy and offers borderless, apolitical transactions.
Pros and Cons of Investing in Bitcoin
Pros
- High growth potential
- Liquidity of the market is great
- It is used by many people as a protection against inflation.
- This means that there are also new investment opportunities for Bitcoin .
Cons
- Highly volatile
- Fees are high
- Not environmentally or socially responsible
- Limited protection against inflation
- There is no protection by investing only in Bitcoin.
How to Buy and Store Bitcoin Safely
You can buy Bitcoin using the online exchanges, physical Bitcoin ATMs or accept Bitcoin for goods or services directly to your wallet. Alternatively, you can trade in person via platforms like LocalBitcoins, visit the sites of those dispensing free samples or join a mining pool (which again comes with certain conditions such as equipment required).
The best option for Bitcoin storage is to keep it on exchange platforms, Bitcoin wallet services or offline in a hard wallet. Your public key is used to receive Bitcoin, and your private key is used to access it.
Note: Never share your private key!
Is Bitcoin Legal?
Bitcoin is perfectly legal to own in many countries (including all Western democracies who protect freedom of speech) since it is simply open source code. Many have tried to ban Bitcoin, but it is simply too decentralized for the likes of countries to completely enforce such bans.
Conclusion
Bitcoin (BTC) has come a long way from a small idea to a digital currency and store of value around the world. It is a new way to deal with money and investing in the digital age. Bitcoin is a decentralized peer to peer currency where miners collect transactions and put it in the blockchain. This is an open public record of all these transactions, which are kept by users, rather than a central authority. Bitcoin can be bought through exchanges, or the price of Bitcoin traded through financial derivatives such as CFDs and spread bets.
Also read: Raoul Pal’s Bold Bitcoin Prediction: Will BTC Hit $500K by 2025?
