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What is Bitcoin and How Does Bitcoin Work?

What is Bitcoin?

Bitcoin is the very first Blockchain and cryptocurrency technology that is introduced to the world. Satoshi Nakamoto created Bitcoin Technology. It is the digital currency in which transactions can be performed without the need for a Central Bank or credit card.

What is Bitcoin

Characteristics of Bitcoin

  1. Durability
  2. Portability
  3. Fungibility
  4. Scarcity
  5. Acceptability
  6. No verification authority
  7. Easier to secure
  8. Easier To Transport

Components of Bitcoin

  • Software
  • Cryptography
  • Hardware
  • Miners

How Does Bitcoin Work?

Bitcoin is more than a cryptocurrency used for payments or as an investment. There is an entire ecosystem at work behind a cryptocurrency. In fact, many such ecosystems are at work on the internet today, but because Bitcoin was the first, it’s useful to understand how it functions.

So how does Bitcoin work? Bitcoin is a decentralized digital currency that operates without the need for a financial system or government authorities. It utilizes peer-to-peer transfers on a digital network that records all cryptocurrency transactions. This network is powered by the blockchain, an open-source code that pairs (or chains) blocks of transaction histories to prevent manipulation.

How Does Bitcoin Work

Because these transfers are confirmed directly between users and are located on a shared public ledger, Bitcoin eliminates the need for central facilitators, like governments and banks, to verify currency transactions.

Learn what’s going on behind the scenes in the Bitcoin network to help you further your understanding of this digital phenomenon and how it influences the world’s finances.

Uses of Bitcoin

  • You can buy and sell Bitcoin from your phone or computer.
  • You can even use it to pay for things directly from your Bitcoin wallet in establishments that accept it as a form of payment.
  • Spending Money Privately
  • Low-cost money transfers
  • Day to Day purchasing of normal things

What is Bitcoin mining?

Bitcoin mining is when a Bitcoin miner uses a computer—called a mining rig—to solve complex mathematical puzzles to mine blocks of Bitcoin. The first computer to solve the puzzle will be able to confirm the Bitcoin transactions held within the blocks and receive Bitcoin as a reward. This verification process ensures the security of this cryptocurrency

Keep in mind that cryptocurrency mining is costly and its reward rate is sporadic.

How to create Bitcoin

A mining process makes new Bitcoins. The Bitcoin creators set its system to create coins at a fixed rate until miners release all 21 million allotted Bitcoins.

Bitcoin is mined by solving complex mathematical puzzles using a mining rig, a powerful computer that can create thousands of random strings per second to solve the puzzle. This process verifies cryptocurrency transactions and creates new Bitcoin as a reward.

Mining rigs can range from a computer with a powerful core processing unit to an application-specific integrated circuit specially built just for mining crypto.

How to earn Bitcoin

You can earn Bitcoins in several ways besides mining, including:

  • Odd jobs: Some companies offer Bitcoins as a reward for completing tasks, like testing their website or retweeting posts. Sometimes, the task is as easy as answering a question.
  • Form of payment: Many major payment apps now allow people to pay each other with Bitcoin and other digital currencies. If you perform a service for someone or sell a product, you can request payment in Bitcoin via CashApp, Venmo, or PayPal.
  • Online games: Some online games offer Bitcoin rewards for completing tasks or winning games.

Where to buy Bitcoin

Mining Bitcoin isn’t the only way to obtain it. Bitcoin can be purchased on the open market. Here are a few places where it can be bought.

  • Cryptocurrency exchange: Bitcoin can be purchased on various crypto exchanges using fiat money. Sign up for an account and purchase Bitcoin.
  • Investment firms: Some investment firms have begun offering Bitcoin as an option. Sign up to buy and sell Bitcoin—and other cryptocurrencies—like any stock or bond.
  • Bitcoin ATMs and retail stores: Bitcoin can be purchased through Bitcoin ATMs. Use your debit or credit card at the ATM to purchase Bitcoin, and it will deposit the currency into your preferred digital wallet. You can also go to a retail store that sells Bitcoin and purchase it there.
  • Banks: Select banks now support Bitcoin buying and selling. If you have a bank that offers this service, you can buy Bitcoin through your online banking interface.

How to use Bitcoin

While Bitcoin isn’t a widely accepted payment form, it can be spent in several ways other than liquidating it to fiat currency.

  • Debit card: A Bitcoin debit card allows you to spend crypto anywhere that accepts debit cards. When the card is used, the proper amount of Bitcoin to local fiat currency is converted.
  • Retail stores: Some online stores, such as Newegg and Overstock, now accept Bitcoin as a payment option. There is no need for a special debit card—simply choose Bitcoin and check out that way.
  • Donation: Some charities now accept Bitcoin as a donation method. You may also be eligible for a tax deduction, and the charity pays no capital gains tax on the Bitcoin it receives.

Bitcoin pros

  • Cost-efficient transactions and fast speeds. Once you own Bitcoin, you can make transfers anytime, anywhere, reducing the time and potential expense of any transaction.
  • Transactions don’t contain personal information, such as a name or credit card number. While it’s still possible to link a certain person to a certain wallet, transactions are generally more private than credit card transactions, for example.
  • Decentralization. After the financial crisis and the Great Recession, some investors are eager to embrace an alternative, decentralized currency — one that is essentially outside the control of regular banks, governing authorities, or other third parties.
  • Growth potential. Some investors who buy and hold the currency are betting that once Bitcoin matures, greater trust and more widespread use will follow, and therefore Bitcoin’s value will grow.

Bitcoin cons

  • Price volatility. While Bitcoin’s value has risen dramatically over the years, buyers’ fortunes have varied widely depending on the timing of their investment. Those who bought in 2017 when Bitcoin’s price was racing toward $20,000, for example, had to wait until December 2020 to recover their losses. More recently, Bitcoin’s price began in 2022 at slightly over $47,000 per coin. After a tough year for cryptocurrency in general, Bitcoin has slumped to its current price of just under $17,000.
  • Hacking concerns. While backers say the blockchain technology behind Bitcoin is even more secure than traditional electronic money transfers, there have been a number of high-profile hacks. In May 2019, for instance, more than $40 million in Bitcoin was stolen from several high-net-worth accounts on the cryptocurrency exchange Binance. (The company covered the losses.)
  • Not protected by SIPC. The Securities Investor Protection Corporation insures investors up to $500,000 if a brokerage fails or funds are stolen

Storing your Bitcoins: Hot wallets vs. cold wallets

If you decide to buy Bitcoin, you’ll need a place to store it. Bitcoins can be stored in two kinds of digital wallets:

  • Hot wallet: You can often store cryptocurrency on exchanges where it is sold. Other providers offer standalone online storage. Such solutions provide access through a computer browser, desktop or smartphone app.
  • Cold wallet: An encrypted portable device much like a thumb drive that allows you to download and carry your Bitcoins.

Basically, a hot wallet is connected to the internet; a cold wallet is not. But you need a hot wallet to download Bitcoins into a portable cold wallet.

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