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What is Bitcoin and how does it work?

If you have heard about cryptocurrencies, then there is no doubt you have heard of Bitcoin. As the first and most well-known digital currency, Bitcoin has gained immense popularity and sparked a revolution in the world …

If you have heard about cryptocurrencies, then there is no doubt you have heard of Bitcoin. As the first and most well-known digital currency, Bitcoin has gained immense popularity and sparked a revolution in the world of finance. But what exactly is Bitcoin, and how does it work?

Bitcoin is a decentralised digital currency that was created in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. It operates on a technology known as blockchain, which is a public ledger that serves as a transparent and immutable record of all transactions. Unlike traditional currencies that are issued and regulated by central banks, Bitcoin is not controlled by any single entity or government. Instead, it relies on a network of computers, called nodes, that collectively maintain the integrity and security of the system.

At its core, Bitcoin is a peer-to-peer electronic cash system. It allows individuals to send and receive payments directly without the need for intermediaries such as banks or payment processors. Every transaction made with Bitcoin is recorded on the blockchain, ensuring transparency and security.

To ensure the security and validity of transactions, Bitcoin relies on a process called mining. Mining is the process by which new Bitcoins are created and transactions are verified and added to the blockchain. Miners, which are nodes in the network, compete to solve complex mathematical puzzles to validate and add new transactions to the blockchain.

The mining process involves assembling pending transactions into blocks and attempting to find a specific solution, known as a hash, for each block. This process requires significant computational power and is resource-intensive. Miners need to make numerous calculations to find the correct hash. The miner who successfully finds the solution first is rewarded with newly minted Bitcoins, serving as an incentive for miners to participate in the network.

Once a block is successfully mined and added to the blockchain, the transactions within that block are considered confirmed and cannot be altered. This immutability ensures the integrity of the system, making it highly secure against tampering or fraud.

Bitcoin’s limited supply is another crucial aspect. Nakamoto intended for the unit prices of Bitcoin to eventually align with traditional fiat currencies, so 0.001 BTC would be worth 1 Euro or 1 USD, for instance. To maintain scarcity, the number of Bitcoins is capped at 21 million, making it comparable to digital gold.

While mining plays a crucial role in the operation and security of the Bitcoin network, it is not without challenges. As more miners join the network, the competition to find the next block increases, making it more difficult and resource-intensive. Additionally, the computational power required for mining has raised concerns about its environmental impact. However, it’s worth noting that the Bitcoin network has incentivised the development of renewable energy sources in some regions as miners seek out cheaper and more sustainable energy options.

Bitcoin Halving

Bitcoin halving is a significant event that occurs approximately every four years and has a profound impact on the Bitcoin ecosystem. It refers to the reduction of the block reward given to miners for successfully mining a new block. When Bitcoin was created, the block reward was set at 50 Bitcoins per block. However, as part of its design, the protocol automatically halves this reward approximately every 210,000 blocks or roughly every four years. The most recent halving occurred in May 2020, reducing the block reward to 6.25 Bitcoins. This halving mechanism serves to control the issuance of new Bitcoins and create scarcity over time, mirroring the limited supply of precious metals like gold. The halving events play a crucial role in Bitcoin’s economic model, influencing its inflation rate, and miner incentives, and potentially impacting its price as the available supply becomes scarcer. The next halving is expected around 2024. It will drop the block reward to 3.125 BTC.

Market Capitalisation

As of October 2023, Bitcoin remains crypto king with a market capitalisation of $555 billion. While this figure is impressive, it falls short of its previous all-time high market cap of $1.24 trillion, achieved in October 2021. During that time, Bitcoin also hit its peak value of $66,000, sparking excitement and speculation among investors. Beyond its soaring valuations, Bitcoin continues to maintain its position as the most liquid cryptocurrency. Its robust liquidity further solidifies Bitcoin’s status as the go-to digital asset in the market.

Takeaway

Bitcoin has established itself as the leading digital currency, offering convenient transactions and attractive mining incentives. Bitcoin was designed to serve as a means of transaction outside the realm of official legal currency. Ever since its inception in 2009, Bitcoin has witnessed a remarkable rise in popularity and its applications have broadened, leading to the emergence of numerous alternative cryptocurrencies. Individuals seeking to invest or speculate can engage in the buying and selling of Bitcoin through crypto exchanges.

Where can I buy Bitcoin?

Although Bitcoin remains a highly volatile unregulated asset, you can buy Bitcoin by using one of any number of the popular cryptocurrency exchange sites that exist. You can also buy Bitcoin through popular payment providers such as Paypal↗︎ and Skrill↗︎ and digital banks such as Revolut↗︎.

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