How does Bitcoin work? – Technical guide
In March 2021, Bitcoin hit an all-time high that once again made this world’s first and most popular digital currency an important part of every headline. For decades, cryptocurrency has been widely accepted by retail investors and large institutions. Its many spectacular peaks have always made headlines, but this recent rise in the price of Bitcoin has made it clear that it is indeed a staple of the crypto landscape.
However, with Bitcoin’s dramatic volatility, this hardly makes it the best choice for first-time investors or those looking for a stable store of value. This is why it is important to understand how Bitcoin works before opting for it.
What is Bitcoin?
Bitcoin is a decentralized digital currency that you can buy, sell and trade directly, without an intermediary like a bank. Digital currency was created in 2008 by Satoshi Nakamoto, with the vision of creating an electronic payment system that will be based on cryptographic evidence instead of trust.
Every Bitcoin transaction that has occurred exists on a public ledger where it is accessible to everyone, making it very difficult to tamper with Bitcoin transactions. At the same time, the transactions are not reversible. Bitcoin is not backed by the government or any issuing institution.
Although the coin once sold for around $ 67.81, it has continuously seen a dramatic increase in price since its public launch in 2009. Moreover, experts predicted that the price would continue to rise even in the years to come. to come, thanks to its limited offer.
How does Bitcoin work?
Blockchain is a shared public ledger upon which the entire Bitcoin network is built. As the name suggests, the blockchain is a set of related data, made up of small units called blocks that contain information about every transaction made on the Bitcoin network. The blocks contain all the details including time, date, total value, buyer and seller, as well as a unique ID code for each trade.
The blockchain is decentralized, which means that it is not controlled by any organization. However, anyone with a connection can contribute. While it may sound risky, this is actually what makes the Bitcoin blockchain safe and trustworthy. Before a transaction can take place on the network and its block is added to the Bitcoin blockchain, it must be verified by the majority of all Bitcoin holders.
This makes it almost impossible for anyone to conduct fraudulent Bitcoin transactions. The probability of correctly guessing your Bitcoin wallet keycode is the same as the probability of someone winning a Powerball lottery nine times in a row.
Bitcoin mining: how does it work?
Bitcoin mining is the process of adding new blocks (transactions) to the Bitcoin blockchain. It is quite difficult work and requires a lot of energy. Due to the difficult nature of the job, miners are rewarded with new Bitcoins for their hard work. And that’s how new pieces are created.
However, mining is not what it was in the past. It is now more difficult and requires more computing resources to solve the mathematical puzzles that verify transactions before they are added to the Bitcoin blockchain.
Miners now need powerful computers and access to massive amounts of cheap electricity to mine Bitcoin.
Halving: Another Tech Term You Need To Know
As we have already explained, miners receive their reward in Bitcoin for their hard work, verification of blocks and transactions. However, for every 210,000 blocks mined, or roughly every four years, this reward is halved. This event is called “dividing by two” and it is done to control the amount of Bitcoin mined.
After the last halving that happened on May 11e, 2020, the reward for each block mined is now 6.25 Bitcoin versus 12 Bitcoin they get before halving.
How does Bitcoin make money?
Digital currency obeys the law of supply and demand. This means that due to the rise and fall in demand that occurs from time to time, there is a lot of volatility with the price of the currency. So, apart from mining for a reward, people also buy bitcoin as a form of currency speculation, waiting to sell when the price rises.
Storing your Bitcoin: cold wallets and hot wallets
Regardless of how you get your Bitcoin, whether as a reward for mining or buying, you’ll need a digital wallet to store it. These portfolios can be of two types. You can either store your Bitcoin in a hot or cold wallet.
A warm wallet, also known as an online wallet, provides a way to store your Bitcoin in the cloud on a trusted exchange or provider, and accessed through a smartphone app, computer browser, or desktop computer. Common examples of online wallet providers include Exodus, Mycelium, and Electrum.
On the other hand, a cold wallet is an offline device used to store your bitcoins without having to connect to the internet. Since these wallets do not require internet connectivity, they are considered more secure and protected from hackers. Some examples of this include Ledger and Trezor.
How to use Bitcoin?
In the United States, Bitcoin is used by people as an alternative investment, helping them to diversify a portfolio outside of bonds and stocks. Bitcoin can also be used to make purchases, as more and more sellers now accept it as a method of payment. However, the number of providers that accept cryptocurrency is still limited.
Some services also allow you to connect your crypto account to your debit card. This means that you can use Bitcoin the same way you would use a credit card.
In other countries, especially in places where currencies are less stable, people sometimes use cryto instead of their own currency.
Bitcoin can also be used to store value without depending on a government backed currency. This gives people a superior advantage for the worst case scenario. In countries like Argentina, Venezuela and Zimbabwe which are heavily in debt, Bitcoin is making great strides there.
Where to buy Bitcoin
There are mainly four options available to you when it comes to buy bitcoin. This includes :
- Bitcoin mining: we have already explained that. This is one of the ways to get Bitcoin, but it requires a lot of technical expertise and IT costs. For this reason, this option is not within the reach of most people.
- Cryptocurrency Exchanges: these are platforms from which you can buy or trade over 30 cryptocurrencies, including Bitcoin. The largest cryptocurrency exchange in the United States is Coinbase.
- Bitcoin ATMs: they are kiosks where you can buy Bitcoin and other cryptocurrencies in cash or by debit card. There are over 7,000 Bitcoin ATMs in the United States.
- Investment brokerage: A good example of this in the United States is Robinhood Crypto, and it is available in most US states, but not all.
- Peer-to-peer purchases involve buy Bitcoin directly from other Bitcoin owners through peer-to-peer tools such as Bitquick, Bisq, and LocalBitcoins.
Should you buy Bitcoin?
Although Bitcoin is expensive, you can buy fractions of Bitcoin from vendors. In such a situation, you will be charged a small percentage of your crypto transaction amount as a transaction fee.
So, coming back to the question of whether you should buy Bitcoin, it is totally up to you. If you think it’s good for your wallet, why not? But remember, Bitcoin is extremely speculative and volatile. So if you are new to cryptocurrencies, you might want to consider less risky cryptos.
However, if you want to use Bitcoin or any other crypto, it is recommended that you invest no more than 10% of your overall portfolio. Always invest what you can afford to lose!