Bitcoin has been around for a couple of years now, but many still don’t know what this decentralized coin is. The world’s cryptocurrency pioneer has now built a name for itself, and everyone in the investing world has heard of this.
First launched in 2009 by a Japanese creator, Bitcoin can be used for payments and has a stored value like gold. Since its creation, Bitcoin has seen an enormous increase — from just a few cents per bitcoin to several thousand dollars. It is represented by the acronym BTC.
To further explain how BTC works, it is a decentralized cryptocurrency coin. Decentralized means that the object has no single centralized governing body. Cryptocurrency, on the other hand, is a group of assets that undergo a practice of encoding and decoding.
When transacted, these coins get distributed across the world through blockchain. As it exists on their own, there is no government or banks that manage these coins.
An alternative to fiat currency
The coins were first designed as an alternative to traditional currency. Its main goal was to make it so universal that it could be accepted across the world as a legal tender, and that we didn’t have to deal with currency exchanges anymore.
However, as time passed, the value of Bitcoin became very volatile. This meant that the price of Bitcoin was highly affected by market conditions and sentiments. The price of each Bitcoin was so volatile, that it could rise or fall by thousands of dollars each day, making it a less-than-ideal payment option. Bitcoin works almost completely opposite from traditional money. It does not have a fixed supply, and prices are not fixed.
How does Bitcoin work?
There are three separate components when it comes down to Bitcoin.
- Bitcoin network
- Native cryptocurrency of Bitcoin — BTC
- Bitcoin blockchain
It’s easy to transact Bitcoins, not requiring any intermediary help as it runs on a peer-to-peer network. Those on the network can choose to download a public ledger, where all necessary information is stored. This network is run on a blockchain, which allows for effective and safe use of the network. It is extremely secure and ensures that no information can be easily leaked.
This is especially useful on a network that is not managed by a single body. When new transactions occur, the network will automatically update every copy.
Blockchain is out in the public domain, its transparency allows users to monitor and track the fluctuations of its value. When a transaction is made, all users on the same network have to unanimously agree and come to a consensus. Just like all other banks, those on the Bitcoin ledger have to confirm and update their copies.
What is proof-of-work?
Every machine in the Bitcoin network uses a process named proof-of-work to ensure a consensus between all users is reached. Typically, some also use proof-of-stake, which requires much less energy to run.
Proof-of-work is used by cryptocurrency miners, who dedicate time and energy to creating new Bitcoins into the system. How this works is that when a new block is added to the chain, the miner who found that block will be rewarded with the fees that were tied to that transaction.
Mining is very expensive, and all miners cover the cost of their machines running, which typically takes up a lot of energy. In order to maximize their profits, miners would prioritize their biggest transactions.
How is Bitcoin created?
When a new block is added to the chain, newly minted bitcoins are released to each miner. There is a total supply cap of 21 million Bitcoins, which means that when the cap is reached there can be no new Bitcoins added to the system. The increase in computing power does not guarantee that more Bitcoins are mined, but rather just increases the chances of being rewarded with the next block.
Using the strategy of “Bitcoin halving”, what this does is that the amount distributed to miners reduces over time and helps regulate the price of the asset. The next halving is expected to take place in the next two years, this will continue until there are no more coins left to be mined. Mining is not easy.
Currently, there are over 18.7 million BTC in circulation and the total supply of Bitcoins in circulation is expected to hit its capacity in the year 2140, taking into consideration other factors.
What is a Bitcoin wallet?
A Bitcoin wallet essentially provides users with the ability to secure, send and receive Bitcoins. It runs on a dedicated computer or device which requires a specific kind of password for transactions to take place. It helps to prove the ownership of Bitcoin.
When a Bitcoin is transacted, there is a transfer of ownership from the owner to the recipient. The recipient will be given a ‘key’ for the transaction to pass through. In order to preserve the integrity of the blockchain, Bitcoin adopts public-key cryptography (PKC), which aims to secure transactions.
Both a private and a public key can be used to authenticate transactions. On the Bitcoin network, a PKC is very solvable in one way, but very difficult to reverse. Using a mathematical algorithm, the blockchain can create a public key from a private key.
It is thus very important to always remember passwords as the move is irreversible. The address that is made is used to house all Bitcoin transactions, while the private keys are not to be shared with anyone other than yourself. To transact, you will need both keys to encrypt transactions. This ensures the security of all transactions. After all, you don’t want your Bitcoins landing in the wrong hands.
With that, we’ve come to the end of this article. Bitcoin can seem like an intimidating topic, especially if you’ve no idea what cryptocurrency is and how it really works. Bitcoin is a very powerful, but very volatile cryptocurrency coin that many people in the world own. Before you dive right into the cryptocurrency world, you will need to fully understand the back-end movements of this unique coin.