Bitcoin is the leading cryptocurrency today. It was introduced in 2008 by Satoshi Nakamoto, who is widely believed to be a pseudonymous individual or group of developers. Bitcoin is designed to be untraceable and unhackable. It has been steadily rising in value, although there have been a few significant bumps along the way.
If you are interested in this popular cryptocurrency or if you are planning to add this new asset class to your portfolio, here are some of the crucial information to help you understand how Bitcoin works.
Bitcoin as Cryptocurrency
Bitcoin is a type of cryptocurrency. In a nutshell, cryptocurrencies are lines of code created by high-performance computers, and hold actual, monetary value. Cryptocurrencies are also referred to as digital currencies, since they can be used as or exchanged for cash, even though they can’t be physically held.
Bitcoin, like other cryptocurrencies, depend on cryptography to create new coins and protect transactions based on it. Although there are currently thousands of cryptocurrencies available in the market right now, only Bitcoin and a handful of other coins are worth investing in.
Transactions that are made by Bitcoin users are recorded on a public ledger known as the blockchain. Bitcoin transactions are not managed by a single entity, but by a group of people known as miners. Miners group every new transaction within a specific time frame into a block. Each block is then added to other blocks made before it, forming a chain that is protected by very complex cryptography. This is where the term blockchain comes from.
Every transaction on the blockchain records the digital address of the user’s wallet. However, it does not record the name of the user. This means that even though Bitcoin transactions are transparent, it is anonymous at the same time.
The blockchain is virtually unhackable. You are going to need considerable computer power to change any transaction on the blockchain. Even when you do have the resources to do this, you’ll have to do it in a public space where thousands of other users can see precisely what you are doing.
Bitcoin Values and Regulations
The value of a single Bitcoin varies daily. There are websites and tools online that can help you monitor the current par rates. Bitcoin is self-contained and non-collateralized. This means that the value of Bitcoin resides within itself, and is not attached to a precious metal. At the moment, more than $2 billion worth of Bitcoins are in circulation. Bitcoin production will stop when the total reaches 21 billion coins, which is estimated to occur in the year 2040.
Bitcoin is a decentralized and unregulated currency, which means that banks don’t monitor the movement of coins, and government tax and law enforcement agencies don’t track transactions. This is something that may eventually change, but the current lack of government oversight makes Bitcoin very attractive to investors and criminals alike.
Investing in Bitcoin
While Bitcoin is relatively more stable compared to other types of cryptocurrencies, it is still considered an extremely volatile asset class, with values that rise and plummet significantly every single day.
It is also recommended to use tools, such as a software program, that will help you make smarter trading and investing decisions. Bitcoin Code, for instance, can identify and predict trends in the market, detect increases or falls in cryptocurrency prices, and automate certain trading options.
Bitcoin is a digital currency, meaning that it only exists online. Similar to gold, it has its own monetary value while simultaneously being a commodity as well. If you are planning to purchase and use Bitcoin, you are going to need two important digits: a public key and a private key.
A public key is essentially your username. It is the address recorded on the blockchain. If you want someone to send you some Bitcoin, they are going to need to know your public key. On the other hand, a private key functions as your password. If you want to send Bitcoin from your wallet to another person, you will need to have your private key in hand.
Hot and cold are the two types of Bitcoin wallets. The former is connected to the Internet, while the latter is not. It is recommended to store your coins in both types simultaneously for greater security. This is similar to how you would have some cash in your physical wallet, at the bank, or in your home safe.
Bitcoin transactions are characterized by the following features:
- Pseudonymous – Transactions and accounts are not connected to real-world identities. The public keys or addresses that are recorded on the blockchain consists of a chain of alphanumeric characters. Although you can easily analyze the flow of transactions, it is more difficult to connect such addresses with users in the real world.
- Irreversible – Once a transaction has been confirmed, it can’t be reversed by anyone. Not even your bank, a miner, or any government agency.
- Secure – You can only send Bitcoins from your wallet when you have your private key. Your funds are, essentially, locked into a cryptography system that is nearly impossible to break.
- Fast and Global – Bitcoin transactions are confirmed within a matter of minutes. This is true even if you are sending coins to a user from another part of the world. The network is global, so your physical location does not matter and you won’t get charged extra fees for international transactions.
Bitcoin mining requires the use of a computer to solve proof-of-work problems, which are complex and computationally intensive mathematical problems. The prohibitive hardware requirement for mining also acts as a security measure against people who may try to manipulate the network.
A single computer that works around the clock may earn between 50 to 75 cents daily. Small-scale miners are likely to spend more on electricity costs than earn money from mining. It is, therefore, more beneficial for them to join a group of miners to obtain more hardware power. Large-scale mining operations often run multiple powerful computers simultaneously to earn more from mining.
If you are planning to invest in Bitcoin, it is always a smart idea to learn as much as you can about the cryptocurrency. Learning how Bitcoin works will help you make informed and wiser decisions when you are trading or investing.