What is Bitcoin? Everything you need to know explained in 8 topics

Everything you need to know about Bitcoin

What is a bitcoin and how does it work? Bitcoin is a digital currency that operates free from any central control or supervision by banks or governments. Instead, it relies on software and end-to-end encryption. A public ledger records all bitcoin transactions and copies are kept on servers around the world.

What is bitcoin? This cryptocurrency has made headlines in the past for its massive rise in value, its drops in value, and the rush that financial authorities are in to regulate it. However, the real story is the degree to which Bitcoin democratizes global financial systems. Bitcoin is not just a cryptocurrency, but also a new financial system that comprises many components. It was, if you believe the legends, invented in 2008 by the mysterious Satoshi Nakamoto (who no one has ever seen or knows who he is) and released shortly afterwards to the public.

Most importantly, Bitcoin is not controlled or owned by any individual, company or government. It uses encryption extensively and relies on a peer-to-peer network. In this article, we will try to explain what bitcoin is and give you a direction for your journey in the cryptocurrency universe.

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What is bitcoin
No! Bitcoin is not a coin with the B.

What is Bitcoin?

Although Bitcoin is often referred to as “anonymous money”, its blockchain is perfectly transparent and can be inspected by anyone at will. This apparent contradiction makes it a revolutionary way for people around the world to gain greater financial freedom: Bitcoin does to money what the Internet did to information, providing indiscriminate access to a decentralized financial system. But then what is Bitcoin?

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The Bitcoin protocol establishes the rules of this financial system, including how many Bitcoins can exist and how they are created and transferred between users. This protocol is incredibly difficult to change, as any change requires overwhelming consensus from its participants.

Bitcoin software refers to programs that use the Bitcoin protocol to verify their individual rules and transactions. These programs act as nodes in the distributed Bitcoin network. Nodes can also act as miners, which means they will use cryptographic proof of burned electricity to secure the network, for which they are rewarded with freshly mined Bitcoins. If you want to know more about the mining process, we have a full article about it here.

A real impact

Once you understand what bitcoin is, you need to know your place in the market.

The idea is that you use cryptography to control the creation and transfer of money, rather than relying on central authorities. Since the success of Bitcoin, thousands more virtual currencies have been introduced, with varying degrees of success and popularity, such as Ethereum, Litecoin, Monero and Dash. There were even crowdfunded cryptocurrencies such as Lisk and so-called “meme coins” such as Doge Coin, which were supposed to be just a joke and became a very serious business.

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The Doge of the Internet Has Become Virtual Currency

Many other cryptocurrencies ended up dying out of lack of interest and the simple fact that no one used them. Non-Bitcoin cryptocurrencies are collectively known as altcoins and are more or less based on the same idea of ​​a decentralized digital medium for exchange. If you want to read more about altcoins, just click on this article.

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Their success depends on how much 'money' (the total value of transactions) they have spread across the network point to point (that is, the virtual economy). Since Bitcoin is open source and everyone can see what bitcoin is, anyone can develop their own cryptocurrency using the same technology.

Valuation through scarcity

Bitcoins obtain their value in part through their scarcity, which is defined by a cryptographic lottery. You can buy Bitcoins at cryptocurrency exchanges (bitcoins exchanges) online or you can earn them through a process known as 'mining'. As Bitcoin is not a physical currency, but a virtual one, it also needs to be stored in a digital wallet, which can be a hot wallet or a cold wallet.

Bitcoin mining programs calculate an encryption function called hash in a set of random numbers. Coins are awarded to any miner who calculates a number below a certain threshold.

To understand what bitcoin is, you also need to know where it comes from. Originally, Bitcoin mining was done by standard PCs, with powerful graphics cards, but as the hash difficulty has increased, the preferred method for mining Bitcoins is to employ a Bitcoin ASIC, a chip designed specifically for this task. However, with the cryptocurrency's higher value - in particular Ethereum - and recent advances in GPU processing power, miners have once again turned to mining graphics cards.

This “lottery” favors those with the biggest and fastest machines, and as of February 2021 there were over 18 million Bitcoins in circulation. Note that the total number of Bitcoins in circulation (virtual) will never exceed 21 million due to the way the system is designed.

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What are bitcoins
Extracting a bitcoin is a slow and time consuming process

As the Bitcoin network gets bigger, the hashing gets more complex and miners get less Bitcoins, so they always need better hardware and higher Bitcoin prices to make it worthwhile. Over the years, Bitcoin has also improved its profile as a currency. In fact, according to a HSB 2020 survey, 36% of small and medium-sized businesses in the U.S. now accept Bitcoin.

Since Bitcoins can be spent on the Internet without using a bank account, they offer a convenient system for anonymous purchases, which also allows money laundering and the purchase of illegal products. Since there is no money stored anywhere, accounts cannot be frozen by the police or PayPal administrators.

That said, since Bitcoin usage can be tracked, cryptocurrency exchanges that operate under federal regulations block access to users who use their Bitcoins for illegal activities. While not taken too seriously before, Bitcoin and other cryptocurrencies are considered by some to be the money of the future. However, in recent years, Bitcoin has literally had its ups and downs.

Ideal for small transactions?

Bitcoin was once considered an ideal system for small electronic payments - so-called micropayments - because it is difficult to transmit small amounts of currency efficiently with existing systems. Credit card fees, also known as swipe fees, can often exceed the purchase price, making it expensive for retailers. However, the steady rise in transaction fees for Bitcoin (also known as the miner's fee) has proven to be a barrier that prevents it from making inroads into the world of micropayments.

Another problem with Bitcoin is the volatility of its value, which exceeds the volatility of other currencies and gold, resulting in large fluctuations compared to the US dollar, for example. In 2013, the value of Bitcoin went from $10 to over $1.000 and in May 2021 it is around $36.000. Because your supply is limited, prices will need to vary to accommodate changes in demand, not the other way around. Unlike gold, Bitcoin has no intrinsic value from alternative uses that could anchor its price.

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Learn how to make money investing in Bitcoins

What caused the Bitcoin boom?

Although it has been around for some time and people already knew what bitcoin is, one of the first peaks was attributed in large part to the economic crisis in Cyprus. The cryptocurrency suddenly offered a more attractive way to finance the money with the promise of constant access.

But while the extent of this relationship was debated, it was only the spark that lit the fuse. However, many feel that the real culprit is the media for attracting attention. The irony does not escape us here, but it is still an important point to make. The limited number of Bitcoins means that inflation just doesn't happen. So intrigue leads to demand, and the only way is to go up.

What is bitcoin
Blockchain

The question is, how many people who buy Bitcoin are buying it to start using it as a means of payment and how many are buying it because they expect the price to continue rising in value? But with many people looking to make a quick buck, the bubble burst seemed imminent. More and more people want a slice of Bitcoin's pie, despite the fact that the currency is only accepted by a small but growing number of outlets.

Perhaps what Bitcoin needs to achieve is broader acceptance as a means of payment as an exchange mechanism. But until that happens, that kind of value driven by people who hope to put their money in a safe place for the collector is not sustainable.

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Is Bitcoin safe?

The cryptographic technique on which Bitcoin is based is the same type used by commercial banks to secure their transactions. The thing about Bitcoin is that it was purposely designed to be unmanageable. There is a built-in algorithm that determines the number of Bitcoins in circulation at any given time. So, technologically speaking, it should be quite robust. But there are always risks, and if loopholes are exposed, it could have dire consequences.

And it is because of these risks that Bitcoin made headlines for less positive reasons, when the virtual exchange Mt.Gox was hit by a DDoS attack by a group of hackers in 2013, and the value of Bitcoin plummeted. But it's not just these types of attacks that are a problem. We always have to keep an eye on the future.

Unsuitable for business?

As a currency, Bitcoin is not stable enough for most businesses. The value of a Bitcoin fluctuates dramatically, and since there are no controls, there is nothing to stop money from disappearing if the price drops. Of course, over time, with the increasing number of companies trading and accepting bitcoins as a currency, this tends to change.

Bitcoin payment processors, such as CoinsPaid, offer a way to get around this problem, as they convert the transaction into hard currency almost instantly. Many companies want regulation that provides them with some security and protects them from potential large losses in cryptocurrency.

On the other hand, there are also setbacks that cause bitcoins, and other cryptocurrencies, to end up losing value and affecting their price. Recently, China declared all Bitcoin transactions as illegal, due to the high electricity costs that bitcoin farms generate, in addition to the current shortage of components that has driven up the price of everything from consoles, graphics cards, processors and more. So, these ups and downs that happen daily in the cryptocurrency world is something that should always be analyzed.

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Quick FAQ

What is a bitcoin and how does it work?

Bitcoin is a digital currency that operates free from any central control or supervision by banks or governments. Instead, it relies on software and end-to-end encryption. A public ledger records all bitcoin transactions and copies are kept on servers around the world.

How does bitcoin make money?

By mining, you can earn cryptocurrencies without having to spend money for it. Bitcoin miners receive Bitcoin as a reward for completing “blocks” of verified transactions, which are added to the blockchain.

Is Bitcoin a real currency?

Bitcoin is known as a type of cryptocurrency because it uses encryption to keep it safe. There are no physical bitcoins, just balances kept on a public ledger that everyone has transparent access to (although each record is encrypted).

What is the purpose of buying Bitcoins?

Bitcoin had a first-mover advantage among cryptocurrencies. This gives you relative stability in space. It also has potential hedging benefits that are valued by many investors. Finally, Bitcoin is often compared to “digital gold” as a store of value.

Is Bitcoin legit and safe?

Is Bitcoin legit? Yes, Bitcoin is absolutely a legitimate asset. So much so that publicly traded companies like Microstrategy and Tesla have invested billions of dollars in Bitcoin.

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The future of Bitcoin

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What does the future hold for bitcoins?

There are some signs that governments are starting to look at regulations and that is proving difficult. All these factors are significant barriers that are decreasing Bitcoin's chances of becoming a more widespread and popular currency. Major economies such as India are even considering banning cryptocurrencies outright, which will have an even greater negative impact on virtual currency, largely driven by sentiment.

Despite all this, Bitcoin's market capitalization reached $1 trillion in February 2021. Previously, Goldman Sachs, a multinational financial group, said it was more plausible that Bitcoin could have a significant impact in terms of its innovation. in payments technology, “forcing existing users to adapt to it or co-opt it”.

However, the Goldman Sachs report also said that Bitcoin's 'biggest hurdle' will be maintaining its cost advantage in the face of greater regulation, higher operating costs and competition from entrenched users. Fitch Ratings, one of the world's largest credit rating agencies, reached a similar conclusion and found that Bitcoin will lose much of its appeal if Bitcoin companies are forced to deal with the added cost of regulation, making the Bitcoin network much less economical than it is today.

It seems that the absolute success of Bitcoin, which made it jump from a gloomy entity to a case of the popular boom overnight, also damaged its long-term viability. It remains to be seen whether Bitcoin can go beyond its niche to gain broader acceptance and, for now, cryptocurrency remains quite volatile, and a bet for investors that has been compared to the technology bubble of the 1990s.

Still have doubts about what Bitcoin is? Leave it in the comments! Also, read our articles on other elements that are part of the cryptocurrency universe.

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Paulo Fabris is a journalist, writer, RPG player, gamer, cosplayer, nerd and fan of anime since the time of TV Manchete.