What is Bitcoin & How it Works?


Key Takeaways

  • What is Bitcoin?
  • How it works
  • The benefits & pitfalls of joining the Bitcoin arena
  • What gives BTC Value

What is Bitcoin?

March 4, 2021 | AtoZ Markets – Bitcoin, the first cryptocurrency ever created is a form of digital cash outside the control of any government or 3rd party financial institution. The Bitcoin protocol is run by a decentralized network of computers distributed around the world. The technology that BTC is built on (the Blockchain) allows the management and tracking of all transactions. The Blockchain is a public virtual ledger and anybody can access the data at any time.

A revolutionary invention first created in 2009, Bitcoin has given users the ability to send and receive digital assets instantly. People are drawn to the cryptocurrency because of its uncensored attributes. Furthermore, its permissionless nature means that anyone can participate in the ecosystem and transactions can be made at anytime from anywhere and at exceptionally low costs.

The Bitcoin Origin

There is still a lot of mystery surrounding the cryptocurrency. It is known that it came into inception in 2009, but the creator remains a pseudonym. The unknown creator, known as Satoshi Nakamoto, who began writing the code for the Bitcoin system in 2006 could be one person or a group of people situated anywhere in the world. Although the name is of Japanese origin, several people have identified as likely candidates, but to this day the search continues.

Satoshi authored a throve of emails and social media/forum posts sharing his/her thoughts on the future of BTC before disappearing from the project 2011, just two years after releasing the infamous whitepaper. Since then, developers around the world continue to edit the code with the aim of continuously improving the protocol.

Despite Satoshi being the cited as the mastermind behind Bitcoin, its technology is a result of decades of concepts on how cryptography could be used to create a form of digital cash. Previous ideas that paved the way for Bitcoin include, B-money, Bit Gold and DigiCash.

B-Money

B-money can be traced back as far as 1990 when computer engineer Wei Dai proposed a Proof-of-Work system and an idea like staking that has been cited in the Bitcoin whitepaper. Both functions purposed have been at the center of the crypto sphere and are used in cryptos other than Bitcoin today.

Bit Gold

First proposed in 2005 by Nick Szabo Bit Gold bears great similarity to Bitcoin. For this reason, many believed that Szabo was the real Satoshi. Bit Gold combined different elements of cryptography and mining with the aim of achieving decentralization. These elements generated using proof-of-work strings included timestamped blocks that are stored in a small registry.

DigiCash

DigiCash was an electronic money company founded by cryptographer and computer scientist David Chaum in 1989. DigiCash transactions where unique in that they were privacy-oriented due to several cryptographic protocols used by Chaum. Unfortunately, the company lasted for less than a decade with it being cited that its failure was due in part to the lack of development of Blockchain-based cryptocurrencies. Nevertheless, DigiCash has been an important predecessor of digital assets today.

How BTC Works?

Before you try understanding how Bitcoin works lets first break down how other forms of exchange works.

So, you are sitting in your favourite coffee shop and your friend gives you €10. In this situation the cash is placed directly into your hand, you now have €10, and your friend doesn’t. Simple right?

Your friend gave something of value, and you received it. No need for an intermediary to help make the transfer. It works similarly with Bitcoin. Difference with Bitcoin transactions is they operate digitally. Now you might be thinking, how do I know that the €10 was not sent somewhere else beforehand? Or how can I be sure that copies aren’t made, and funds stolen?

In layman’s terms each Bitcoin is in essence a computer file that are stored in a digital wallet that is accessible through your desktop or mobile device. Each transaction is tracked in a ledger (think of it like an accounting book) that everyone has access to. All transactions that have occurred over time are recorded in this ledger. Thus, people cannot cheat it. The ledger is not controlled by any one person, the rules are already predefined. Furthermore, the code on which it is built is open source meaning anyone can participate in the network. It is there for people to maintain, secure and improve.

Within the Blockchain, the exchange of the digital currency is exactly like the physical exchange of the €10. In other words, it behaves like a physical transfer, but it is still digital. So, Bitcoin true to its design allows the instant exchange of value between two people from anywhere in the world without the need of a middleman.

What makes Bitcoin Valuable?

There are many reasons why people flock towards Bitcoin. Its decentralization, censorship-resistant and secure nature has made it appealing to millions around the world. With traditional forms of payment people are required to present personal information and reveal their identities, BTC eradicates this. For many Bitcoin is a holding game, where people (known as hodlers) hold the crypto for long periods. Many citing the traits below as the reason that makes BTC an ideal medium for storing wealth.

  1. Built-in Scarcity

There will ever only be $21million Bitcoin in existence. It is this build-in scarcity feature that will support its long-term value against non-scarce cryptocurrencies such as Dogecoin and traditional currencies. Most fiat currencies are controlled by a central authority and are subject to the creation (printing) of new units of currency. Bitcoin is like Gold and other precious metals in that it cannot be created haphazardly. In a way it’s this scarcity factor that imbues the digital asset’s intrinsic value.

  1. Transparency of Information

People are becoming more and more concerned with the transparency of personal and financial information. In the case of Bitcoin, transactions are stored in the blockchain making it one of the most transparent forms of payment in the world. Bitcoin allows for a shift in power allowing people make transactions easily with full freedom.

  1. Freedom to Make Secure Online Payments with Lower Fees

Bitcoin creates the ability for instant transactions, whereas with the current financial system payments can take anything between 5-10 working days. The nature of crypto is to allow one-to-one transaction cutting out the need for an intermediary and streamlining of the payment process. As a result, users get faster execution and lower cost without it impeding on security.

  1. Accelerating Adoption

If we trace back to this time last year BTC price sat in at under $5,000, 12 months on and it is flirting with $60,000. The reason for the massive spike is because institutional investors such as Tesla, MicroStrategy, Amazon, PayPal, Mastercard and Visa are getting into Bitcoin as a store of value. Furthermore, more and more individuals are coming off the sidelines for a piece of the action. As the crypto market evolves we will see adoption continue to increase not only across industries and countries but among the growing population as people start using Bitcoin in their everyday lives.

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Disadvantages of Bitcoin

Price Volatility

Despite being the most liquid and easily exchanged cryptocurrency, Bitcoin is susceptible to wild price swings. 2017 is a clear example of the sheer volatility that surrounds the crypto. Towards the end of 2017 Bitcoin’s value had doubled on several occasions, reaching new highs of $19,000 to only halve in the first few weeks of 2018, wiping out billions in market value almost overnight.

Increased Exposure to Scams

Bitcoin is the world’s most popular and affluent cryptocurrency, making it more attractive and profitable for criminals. Since its inception BTC has seen more than its fair share of online scams, fraud, and attacks. These attacks have ranged from small-time Ponzi schemes including Bitcoin Savings & Trust to bigger heists such as Mt. Gox and the Bitfinex security breach. Unlike traditional currencies, Bitcoin has less protection and such attacks likely to be prosecuted by law enforcement agencies.

BTC Transactions Can’t be Undone

Once data has been added to the Blockchain it is virtually impossible to remove it, meaning once you have made a transaction it cannot be undone. So, be sure that you triple check your details and ensure that you are sending funds to the right address.

Are you Ready to Unlock Digital Value?

There is a lot of speculation and critics that circulate the crypto industry. Some say the Bitcoin system is worth a lot and can change the world while others think it is just a fad. Nevertheless, despite the seemingly overwhelming nature if the cryptocurrency industry, once you learn the basics it really is not that complicated to grasp. Arming yourself with the right information you will soon realise that you do not want to be on the fence in this emergent industry.

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