What is Bitcoin and How does Bitcoin work?
What is Bitcoin? Bitcoin is a new kind of money. It is just like gold, a store of value and a virtual asset . But it is not gold, neither is it controlled by the government. It is an electronic currency. A kind of money that is created online, traded online and also exchanged online. Bitcoin is both a value and a means to store, transfer and manage value. Bitcoin eases the concept of value and usage of value.
Bitcoin was created as a way for people to store and send value around the world, anytime, anywhere at virtually no cost without using financial institutions or Fiat currency. The network of Bitcoin is made up of users. It is a community run system.
Bitcoin functions on Blockchain technology and is created through Bitcoin mining. A Bitcoin is the reward for solving complex mathematical puzzles. This reward decreased every 4 years, through a process called Bitcoin Halving.
Key Features of Bitcoin
The governance of the blockchain network does not reside in the hands of one individual (a CEO, for example), the network comprises of willing participants who agree to a protocol and its rules which eventually takes on the form of an open-source software client). Besides users, ‘nodes’, end users, developers, miners and other related related entities such as exchanges, wallet providers, and custodians, contribute to the governance. Bitcoin is easily the most decentralized token in the crypto space.
The amount of transactions added to the blockchain ledger consisting of Bitcoin can be found, according to the rules of the protocol, through a transparent manner.
There is no intermediary required, note that nodes are not considered as a third party even though they carry information about the transaction.
No permission needed
Anyone across the world can use and transact with Bitcoin, as long as the transaction conforms to the rules of the protocol.
Identities of the user are not tied with the transaction details, the transactions take on the form of an address that includes alphanumeric strings that are randomly generated.
Bitcoin transactions are pseudo-anonymous and governments or powerful authorities do not have any control over Bitcoin transactions, it offers users economic freedom.
The transactions are recorded and can be viewed publicly. This avoids frauds but, at the same time does not ensure much security or privacy.
How did it start?
The Bitcoin story started in 2008 with an anonymous founder called Satoshi Nakamoto. This happened soon after the financial crisis of 2008. The use of fiat currency was scrutinized by the Founders of Bitcoin.
Satoshi Nakamoto published a document in an online cryptography forum in October 2008 and revealed the first details of how Bitcoin would work. The paper was titled Bitcoin: A Peer-to-Peer Electronic Cash System. The same is available today at bitcoin.org. The paper consists of methods that allow any two willing parties, to transact directly with each other without any need for a trusted third party or an intermediary.
The first open-source software client for Bitcoin was released in January, 2009 and thereafter any individual who installed the software client could start using Bitcoin.
On 3rd January 2009, Nakamoto mined the first block of the Blockchain. In 2010, Laszlo Hanyecz bought two Papa John’s pizzas for ₿10,000 , which is $35. After that May 22nd is called the Bitcoin Pizza Day.
Satoshi Nakamoto created Bitcoin using Blockchain technology. Blockchain is simply a method of record keeping using math and computer science.
Bitcoin Mining: How are Bitcoins created?
Bitcoin mining is the process of creating bitcoin. It includes verifying bitcoin transactions and recording them onto the public Blockchain ledger. The transactions are verified by the users itself i.e. there is an absence of any Central authority.
The creation, regulation and circulation of Bitcoins are done by users themselves. Any user with mining hardware and internet access can take a part. They can contribute to the mining community.
The process of formation is based on a difficult mathematical puzzle called Proof-of-work (PoW). Every miners job is to solve the mathematical puzzle, in order to validate the transaction and earn rewards. The goal is a 64 digit number.
The network automatically adjusts the difficulty of mining so that Bitcoins are created roughly every 10 minutes . The reason they call it mining is because there’s only a set number of Bitcoins that can ever be mined in the system. It’s like gold mining. Only limited gold can be dug .
There’s only 21 million Bitcoins that will ever be created in total.
What is Blockchain? How does it ensure privacy?
Blockchain is a public ledger, but in a computerized form. It is secure and cheap. Bitcoins use this technology for their record keeping.
Blockchain is a chain of blocks that contains information. They are distributed ledger and are completely transparent. The blocks in the Blockchain stores data . Data entered in the blocks cannot be altered.
Each block contains information about a single transaction between two people. The hash is unique like a fingerprint. It identifies a block and its contents. Hash also detects changes in the block. The block also contains the hash of the previous block. The Hash of the previous block helps to create the chain of blocks and keep them in order.
The first block contains the data and the Hash only . It is called the Genesis block. Any changes in the block would disturb the hash making all the other blocks invalid. Hence it is almost impossible to disturb the working of the Blockchain resulting in less chances of information leakage or frauds.
But Hash cannot guarantee the prevention of tempering. This is why Blockchain has proof-of-work. Proof-of-work slows down the creation of blocks.
The security that Is ensured by Blockchain comes from distribution. The Blockchain uses a peer-to-peer network. When a new block is created, each node verifies it. After thorough verification, the new block is added to each node. This process ensures the privacy and security of user’s data.
Bitcoin: An alternative monetary escape
Bitcoin provides an alternative to the regular monetary system. It was created to eliminate the loopholes that exist in the monetary systems which are controlled by the Central authority. People often refer to bitcoin as the future money. Here’s why :
The fundamental system of banks revolves around creating money i.e. fiat currency . The Bitcoin system is based on mining digital currencies
Banks are middlemen that facilitate the transfer or exchange of money from one person to another. Bitcoin works on a peer-to-peer system eliminating the use of a middleman.
Banks can issue as much currency as they want but there are only 21 million Bitcoins that can be created.
The central governed banks are deeply engrossed in corruption and basically hold all the power in the system. Whereas Bitcoins are free from any type of corruption or temperament and run smoothly .
Central banks take away all the control from a user in managing their own money. Bitcoins on the other hand gives the control to the users to handle their own money.
Banks charge you interest and benefits from your money. Bitcoin operates for free of cost, rather earn you a profit on your investment.
The economic crisis of 2008 which literally shook the financial system of the world gave rise to this parallel economy.
How does Bitcoin work?
The working of Bitcoin is based on three concepts and their principles, namely, cryptography, decentralized networks, supply & demand. Bitcoin utilizes a decentralized network for transactions to be processed and for the storage of data. Bitcoin utilizes cryptography for the conversion of transaction data which is performed through the blockchain network. This why Bitcoin is a digital currency, to be more specific, a cryptocurrency. The supply of Bitcoin is limited, it has a fixed number, which is why it has a good value.
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How does transactions take place?
Bitcoin functions by updating the Blockchain ledger. Every time a new transaction takes place, a new block is added to the chain.
Each hardware that contributes to the network of Bitcoin users gets a copy of this ledger and personally verifies the transaction.
Every user is updated about the new transaction and they record the same into the public ledger.
Bitcoins are a store of value and are used as a replacement of fiat currency. Bitcoins can be used for transfer of values , payments for good and services ( applies only at limited places), store of value and exchange of the same.
How to buy Bitcoin in 2021?
BTC is the native crypto tokens of the Bitcoin blockchain. Bitcoins can be purchased by crypto enthusiasts as an investment on platforms known as crypto exchanges and can be stored in crypto wallets. There are several types of crypto wallets: web, online, mobile, desktop and hardware wallets.
Some of the most popular crypto Indian exchanges for buying and selling Bitcoin (BTC) are:
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Some of the most popular international exchanges to buy BTC are:
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It can be bought by using fiat currency or another type of crypto, this varies upon the crypto exchange chosen by the user. BTC is the number one cryptocurrency around the globe, in terms of market capitalization. It has a circulating supply of 18,771,100 BTC coins and a maximum supply of 21,000,000 BTC coins.
Bitcoin is a volatile digital asset that fluctuated with nearly $100-$200 billion USD in the year 2020. It faces huge rises and falls on a regular basis. It has remained on top for decades because no matter how much the value falls, it always rises right back up.
If you would like to know how to sell your Bitcoins, read this post
Can Bitcoins be converted to cash?
Bitcoins are the new currency. And it can surely be converted to cash or your regular fiat currency.
This can be done by trading your Bitcoin on a crypto exchange market i.e. you can sell bitcoin for cash .
In case your bank supports and accepts Bitcoin as a legal tender, you can en-cash your Bitcoins for cash there.
Bitcoin ATMs allow you to buy and sell bitcoin with fiat currency.
You can also choose a peer-to-peer platform to exchange, trade or sell your Bitcoins for cash.
Is Bitcoin a good investment?
“The days of a currency being tethered to a central bank are coming to an end.” – Miami Mayor @FrancisSuarez .
This is the right time for you to step up your investing game and invest in the future currency today itself .
Is Buying Bitcoin Legal in India?
Buying Bitcoin is and never was an illegal affair. Recently GOI introduced a 30 percent tax slab for all profits gained on cryptocurrencies. Though we are still awaiting a detailed cryptocurrency bill in India, however, that does not make buying or selling Bitcoin illegal.
Bitcoin is the best you can do right now, so dive right in and enjoy the ride without having FOMO. I definitely think BTC is a good investment. For anyone who is interested to be investing in Bitcoin, I would suggest looking into DCA.