What is Bitcoin (BTC)?
Bitcoin (BTC), a decentralized digital currency, enables direct buying, selling, and exchanging without intermediaries such as banks. Its creator, Satoshi Nakamoto, initially advocated for “an electronic payment system based on cryptographic proof instead of trust.”
Every BTC transaction ever made is recorded on a public ledger accessible to all, rendering transactions challenging to reverse and counterfeit. This feature is intentional: as part of its decentralized essence, Bitcoins lack backing from governments or issuing institutions, relying solely on inherent system proof for value.
“The reason it holds value is simply because people collectively attribute value to it—similar to gold,” remarks Anton Mozgovoy, co-founder & CEO of digital financial service company Holyheld.
Since its launch in 2009, Bitcoin’s value has surged significantly. Initially priced at under $150 per coin, as of June 8, 1 BTC equals approximately $30,200. With a capped supply of 21 million coins, many anticipate its value to continue rising, particularly as more prominent institutional investors view it as a digital gold alternative to hedge against market fluctuations and inflation. Presently, over 19 million coins are in circulation.
How Does Bitcoin Work?
Bitcoin (BTC) operates on a distributed digital ledger known as a blockchain. As its name suggests, a blockchain consists of interconnected data units called blocks, each containing transaction details such as date, time, total value, buyer and seller information, and a unique identifier for every exchange. These entries are sequentially linked, forming a digital chain of blocks.
“When a block is appended to the blockchain, it becomes publicly accessible to anyone interested, functioning as a transparent ledger of cryptocurrency transactions,” explains Stacey Harris, a consultant at Pelicoin, a network of cryptocurrency ATMs.
Blockchain operates in a decentralized manner, devoid of control by any single entity. “It’s akin to a Google Doc open for collaboration,” describes Buchi Okoro, CEO and co-founder of the African cryptocurrency exchange Quidax. “No single owner exists, but anyone possessing the link can contribute. As different individuals update it, your version also reflects those changes.”
Although the concept of open editing may seem precarious, it’s this very aspect that underpins Bitcoin’s reliability and security. Before a transaction block can join the Bitcoin blockchain, it must undergo verification by the majority of Bitcoin holders, and the unique codes associated with users’ wallets and transactions must adhere to correct encryption protocols.
These codes, comprising lengthy, random numerical sequences, are exceedingly challenging to counterfeit. The high degree of statistical randomness in blockchain verification codes, which are indispensable for every transaction, significantly diminishes the likelihood of fraudulent Bitcoin transactions.
Bitcoin Mining
Mining involves the validation of transactions and the creation of new blocks on the blockchain. This process is executed by software applications running on computers or specialized mining machines known as Application Specific Integrated Circuits (ASICs).
At the core of mining operations are hashes. Mining programs and machines endeavor to generate a number that matches the block hash. These programs generate hashes randomly and attempt to align them with the block hash, utilizing the nonce as a variable number that increments with each guess. The hash rate denotes the number of hashes a miner can produce per second.
Mining activities occur concurrently across the network, with miners vying to be the first to solve the hash. The miner who successfully accomplishes this task receives the Bitcoin reward, a new block is added to the blockchain, and the process repeats for the subsequent group of transactions.
How to use bitcoin?
In the United States, Bitcoin (BTC) serves as an alternative investment, offering a means to diversify portfolios beyond traditional stocks and bonds. While it’s possible to use BTC for purchases, only a select number of vendors accept this original cryptocurrency.
Among notable corporations that embrace Bitcoin are Microsoft, PayPal, and Whole Foods, alongside various smaller local retailers or specific online platforms, though locating such businesses may require some research.
Furthermore, individuals can utilize services linking a debit card to their crypto account, enabling Bitcoin usage akin to a credit card. Typically, this involves a financial provider promptly converting Bitcoin into dollars.
In contrast, in countries with less stable currencies, cryptocurrency usage, including Bitcoin, sometimes supplants reliance on local currency.
BTC offers a means for individuals to store value independently of government-backed currencies, serving as a hedge against worst-case scenarios. Notably, countries such as Venezuela, Argentina, and Zimbabwe, burdened with heavy debt, witness significant adoption of Bitcoin.
However, when utilizing Bitcoin primarily as a currency, rather than an investment, in the U.S., individuals must be mindful of specific tax considerations.
