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Crypto

What Is Bitcoin?

You may have heard a lot about BTC recently. After all, it’s been on the news every other day. We’ll help you understand what BTC is all about. Join us!
October 26, 2023

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"Bitcoin" is the most popular and most searched term in 2021 with respect to cryptocurrency-related searches, according to Google. In just 2 years (November 2019 to November 2021)  $6,260.91  grew to  $61,309.65, an increase of more than 800%.

Bitcoin has captured the curiosity of a large number of people who want to learn more about it. Most people find it very difficult to understand what Bitcoin is and how it works. Don’t worry, If you are one of them.

We’ve got you covered! This blog will give you a better and deeper understanding of what BTC is all about.

What Is Bitcoin?

Bitcoin is the world's first decentralized and highly popular cryptocurrency, launched in 2009 by an anonymous developer or a group of developers called Satoshi Nakamoto.

He claimed that Bitcoin is a version of electronic cash that would enable payments to be sent directly between parties without the need for a financial institution (P2P).

Bitcoin is an open-source currency and operates on an open network. A type of network where all users have equal authority and are connected to each other without a central server or intermediary company acting in the middle.

This enables seamless data sharing and storage between parties as well as the sending and receiving of Bitcoin payments.

Anyone in this world with a device and an internet connection can participate, view, or share the source code that Bitcoin was built upon. While Bitcoin was the original crypto to do this, a similar decentralized currency called Litecoin was made in its image. Read about it here: Bitcoin vs Litecoin: The Ultimate Guide

Similar to how stocks are traded on the stock market, Bitcoin is also traded.

Bitcoin’s all-time high price was $64,800 as of April 14, 2021. The current price of Bitcoin as of 28 August, 2022 is 19,847.90 USD.

Bitcoin is just one type of cryptocurrency. There are 1000s of more currencies, among which a few are Ethereum, Tether, Binance Coin etc. 

How Does Bitcoin Work?

The way Bitcoin works is very complex and has a massive networking system. The process can be explained by these 2 major aspects:

  • Blockchain (Public Ledger)
  • Private Key

Let’s deep dive into these 2 key aspects to learn the working of Bitcoin.

Blockchain (Public Ledger)

A digital public ledger keeps track of every BTC creation and transaction that takes place in the form of “blocks”. These transactions are recorded in a chronological order, which forms a “chain”. Therefore, it’s called a “Bitcoin blockchain”.

This digital ledger is decentralized and public, enabling anyone with an internet connection and a device to view any transaction in the network’s history. The blockchain’s history is completely transparent while users' identities remain anonymous.

A copy of this ledger is maintained by each User. Or the users can simply download the public ledger and view the previous transactions and history of creations. Think of it like a website, Any internet user across the globe can browse through the website, read the information and view the updated content.

Each time a transaction is made, a new block is formed and added to the chain further recorded in the public ledger. The verification of every transaction takes approximately 10-20 minutes. Those who verify and confirm these transactions are referred to as “Miners”.

The Miners have to solve a complex cryptographic puzzle online in order to verify the transaction. Transactions are queued up to be verified by network miners who attempt to verify multiple copies of the same transaction at once. This process is called “Mining” which is the distributed consensus system of the blockchain. 

As a reward for cracking the cryptographic puzzle and verifying the transaction, Miners are allowed to keep any fees attached to the transaction and are  rewarded in the form of Bitcoins. This is known as "Block reward”. The new Bitcoin created is handed to the successful Miner. Miners are then free to use, hold or sell these Bitcoins.

New Bitcoins are created every time a transaction is verified. Although there is a cap on the total supply of Bitcoin at 21 million coins, the protocol will stop producing new coins once that amount is reached.

The "block reward" halves every four years approximately, which is roughly the time it takes to create 210,000 blocks. The reward for mining Bitcoins was 6.25 Bitcoins per block following the most recent Bitcoin halving, which occurred in May 2020. The Bitcoin halving ensures the amount of Bitcoin distributed to miners reduces over time.

Currently, there are approximately 18.7 million Bitcoins in use, leaving 2.25 million Bitcoins available for circulation. Moreover, keeping in mind the halving principle and additional network variables like mining difficulty, the last Bitcoin is predicted to be mined around the year 2140.

Private Key

With 100s of transactions being processed at the same time, how do the miners believe that the transactions being processed are owned by a legitimate owner?  Blockchain technology is highly encrypted and secured. Let’s see how this technology makes sure all the data and transactions are occurring from a true owner. 

Similar to how you have your wallet to store your bills, a Bitcoin wallet exists to store your Bitcoins and other cryptocurrencies. The main purpose of the Bitcoin wallet is to generate ownership and provide security. 

Every Bitcoin wallet has a public and a private key. Transactions are encrypted and decrypted using these keys, which are sequences of randomly generated alphanumeric characters. 

A Public key is the code you can send to other users, to make transactions, similar to your Email address. Whereas the password to your E-mail address is the private key that should be secured and not shared. 

Transactions are signed using the private key, which serves as a mathematical proof that they originated from the wallet's owner. Additionally, once the transaction has been issued, the signature prohibits it from being changed by anyone.

A public key is generated from a private key via a one-way mathematical algorithm on the blockchain. You would not want to lose or forget your key, since it is impossible to regenerate the private key from the public key with this.

5 Pros Of Bitcoin

Bitcoin's value and user base have considerably increased since its creation. No matter where you land on the financial spectrum, there is a significant amount of risk involved and a potential to generate lucrative returns. Here are a few pros & cons with respect to Bitcoin.

1. High Return Potential

With the growing number of individuals investing and taking interest in Bitcoin, it has higher return potential. The high volatility of Bitcoin prices, which can change significantly on a monthly and even daily basis, can be seen as a benefit by traders.

2. Liquidity

The ever-expanding list of places that accept Bitcoin is increasing as the days pass by. It can be used to make purchases as it only takes a few minutes to send money to another user. This has the benefit of having minimal fees, which makes using foreign currency and currency exchange easier.Additionally, it can be bought and sold at any moment.

3. Accessibility

Bitcoin is easily accessible by anyone across the globe with an internet connection and a device. It is also independent of any governing body. The transaction directly takes place between the sender and receiver which makes it even faster.

4. User Anonymity And Transparency

Bitcoin transactions are completely anonymous. These transactions do not require any personal details or sensitive information from either sender or the receiver. 

Although the transactions are always visible, giving you transparency, blockchain technology still protects them from fraud. Compared to a traditional currency system governed by a central body, personal data is required and can be hacked/leaked easily.

5. Security

Due to Bitcoin's extremely high security, it is impossible to forge or manipulate Bitcoins or its payment network. Bitcoin transactions are highly secured and encrypted with blockchain technology. 

The transactions are also irreversible which makes it even more secure. Since there is no involvement of a third party during the transaction, your money cannot be seized, frozen, charged, demanded, or stolen.

5 Cons Of Bitcoin

1. Highly Volatile

The price of Bitcoin fluctuates drastically, rising and declining quickly. There can only be 21 billion Bitcoins to ever exist, now the fluctuating factor is only the price. This scarcity is what makes Bitcoin so valued. 

Bitcoin’s volatility is highly influenced by the news headlines and the values are very uncertain which is perceived as bad by the investors.

2. Irreversible

Since a Bitcoin transaction is irreversible, there is nothing that can be done if the wrong amount is sent or if it is sent to the wrong recipient. If in any case, a user loses his private key, all his investments, funds, and Bitcoin are inaccessible.

3. No Government Regulations

A decentralised currency can be an advantage as well as a disadvantage. Here, there is no regulation and no one is answerable to any authority which means an issue/scam/fraud cannot be reported or compensated as it is irreversible. 

This is also one of the reasons why people fear Bitcoin transactions.

4. Limited Use

Bitcoin is being widely accepted as a payment option but only at limited places which makes its use minimal. 

5. Future Cryptocurrencies

As Bitcoin has a cap value of 21 billion, it might be replaced by other future cryptocurrencies retaining a superior secure network.

Pros & Cons Of Bitcoin At A Glance

Pros

Cons

High return potential

Highly volatile

Liquidity

Irreversible

Accessibility

No government regulations

User anonymity and transparency

Limited use

Security

Future cryptocurrencies

Is Bitcoin A Good Investment?

After reading this blog, understanding what Bitcoin is, how it works and looking at its pros and cons, it is left to you as to how you view the cryptocurrency and what you desire out of it.

There is always a certain amount of risk involved while investing in any kind of asset. While the asset also has the potential to generate higher returns. It is advised to take time, to do your own research, before making any decisions. 

Note: Facts & figures are true as of 28-08-2022. None of the information shared here is to be construed as investment advice. Exercise caution when investing in unregulated assets like cryptocurrency.

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Priya Bansal
Curious about personal finance and all things money. Can either find me reading a book or dancing to a tune.

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