What is Bitcoin?
Created in 2009, Bitcoin is a cryptocurrency or digital currency. It is based on the concepts defined in a whitepaper by an elusive developer Satoshi Nakamoto. His name is believed to be a pseudonym, and his true identity is not known.
There are lower transaction fees associated with Bitcoin than other online payment processors, and it is a unique decentralized currency that is opposite to fiat currencies that are government-issued and controlled.
Bitcoins and other cryptocurrencies are digital, not physical coins. The balances are kept on a public ledger located on the cloud. They are stored with all other bitcoin transactions and verified by the power of computers.
Another distinctive feature of bitcoin is that it is not guaranteed by governments or banks, and bitcoins are not considered to be commodities.
Bitcoin and other cryptocurrencies are not legal tender, but they are very popular. Bitcoin has inspired many other forms of cryptocurrency in the market, and collectively they are referred to as altcoins.
Major Concepts on Bitcoin
Bitcoin was launched in 2009, and it is considered to be the largest cryptocurrency in the world by market cap.
It is different than traditional fiat currency in that Bitcoin is developed, dispersed, stored, and exchanged with blockchain. Blockchain is a decentralized record system.
The history of bitcoin as a measurement of value has been volatile. At its height in 2017, bitcoin skyrocketed up to $20,000 a coin. In 2019, it fell to less than $10,000 a coin.
Bitcoin inspired many other cryptocurrencies or altcoins because of it's widespread acceptance and popularity.
How to Comprehend Bitcoin
As bitcoin is a cryptocurrency, the token balances of bitcoin are maintained using public and private keys. These keys are long strings of letters and numbers that are linked through a mathematically based encryption algorithm.
The public key is similar to a bank routing number, which serves as the address that is publicly published to the world and allows other people to send bitcoins.
The private key is similar to an ATM pin number and should be kept secret and safeguarded from others because it is used to authorize cryptocurrency transmissions.
These keys for bitcoin should not be confused with a wallet for bitcoin. The wallet is a digital or physical device that allows you to trade bitcoin, and it lets users keep track of coin ownership.
Wallet can be a little misleading as it refers to how bitcoin is stored on a blockchain that is decentralized.
Bitcoin – How It Works
One of the first cryptocurrencies to make use of peer-to-peer technology, Bitcoin offers payments instantly.
Miners are people and businesses that mine for bitcoin. They own the computing power that governs the network by their participation. Miners mine for bitcoin because of the rewards involved, particularly new bitcoin and the transaction fees that are paid.
The miners are the actual decentralized authority that makes the Bitcoin network legitimate.
Miners receive new bitcoin released at a rate that is declining periodically and at a fixed rate. The total bitcoin produced is finite and will equal 21 million coins. There are approximately 3 million coins yet to be mined.
This is how bitcoin operates differently from other forms of currency. Traditional government-issued currencies in a centralized banking system are released based on the rate of growth to maintain the stability of the markets.
Bitcoin runs on a decentralized system that creates the rate of release according to an algorithm and time.
Bitcoins are released into circulation using a method called bitcoin mining. With mining for bitcoin, the goal is to discover a new block in the blockchain by solving a computational puzzle. Once the block is found, it is added to the blockchain.
While miners contribute to the blockchain, they receive a reward of a few bitcoins. The rewards are automatically divided in half with every 210,000 blocks.
When bitcoin was released in 2009, the reward was 50 brand new bitcoins, and that number is currently 12.5. It gets more difficult to mine for bitcoins as more coins are created, and the amount of computing power also increases.
In 2009, the level of mining difficulty was set at one, and by the end of that year, it increased to 1.18. By October 2019, difficulty has increased to over 12 trillion.
There was a time when you could mine bitcoin with a simple laptop computer; today, it takes much more sophisticated hardware and software to mine this cryptocurrency. These expensive systems are often referred to as mining rigs.
A single bitcoin can be divided up into eight decimal places, and this tiny unit is also known as a satoshi. Bitcoin can also be divided up to an even smaller unit if all of the participating miners agree to it.
The Value of Bitcoin
Bitcoin's price is unpredictable, with wild fluctuations. At the beginning of 2017, the price went from just under $1,000 to almost $19,000, which is an increase of over 1400%.
In early 2019, Bitcoin also declined dramatically to around $3,500, leveled out mid-year, and skyrocketed back up to almost $13,000. Then by the end of 2019, pricing ranged from $8,000 to $9,000.
The price of Bitcoin is connected to the mining network's size. When the network is larger and more difficult to mine and produce coins, the price increases with production costs. The aggregate mining network's processing power is referred to as the hash rate.
The hash rate is calculated using the number of times each second that miners try to complete a hashing puzzle before another block hits the blockchain.
In late 2019, it reached a high of 114 quintillion hashes every secondю
The History of Bitcoin
The summer of 2008 saw bitcoin's website registered as bitcoin.org. To this date, the privacy manager is on so that no one can discover the identity of the person or people behind bitcoin.
In October of that year, Satoshi Nakamoto made an announcement on a mailing list at metzdowd.com about working on a new electronic peer-to-peer cash system that had no governing party.
The announcement in its entirety can be found at bitcoin's website here: https://bitcoin.org/bitcoin.pdf.
It has become the standard for how bitcoin works today.
At the beginning of 2009, the first block of bitcoin was mine and called Block 0. It was also called the genesis block, and the creation was also accompanied by a text stating, "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." The statement was to be depicted as proof or verification that the block was mined – making the event official and legitimate.
Five days later, the Bitcoin software version one was announced on the same mailing list. The following day, Block 1 was mined, and mining continued.
The Inventor of Bitcoin
The inventor of bitcoin is unknown, and it is inconclusive. The name associated with bitcoin is Satoshi Nakamoto, but it is a pseudonym for a person or a group of people who really created bitcoin.
The protocol for signing up for bitcoin includes instructions to enter a date of birth, and there is a person registered by the name of Satoshi Nakamoto with a birth date of April 5th.
There have been many people who have come forward to claim to be Satoshi, but the true identity of this person has yet to be revealed.
How to Receive Bitcoin Payments
There are stores online and physical locations that accept bitcoin for payment. There are also companies that pay employees in bitcoin or digital currency. Some casinos also accept and payout in bitcoins through jackpots, betting, and online lotteries.
A lot of bitcoin enthusiasts believe it is the cryptocurrency or digital currency of the future. It is an effective payment system with no fees that allow for transactions around the world.
In spite of the fact that bitcoin is not backed by a government like traditional currencies, it can be exchanged for these currencies. Investors and traders often take advantage of the exchange rate by exchanging currency for bitcoin.
Due to the popularity of digital currency, bitcoin is becoming a viable alternative to traditional currencies and commodities.
In 2014, the virtual currency was recognized by the Internal Revenue Service, stating it would be taxed as property and not currency.
Any trading gains or losses are generally held as capital and recorded as capital gains or losses. Also, in accounting, if bitcoins are stored as inventory, they are listed as ordinary gains or losses. If you sold bitcoins that you originally mined or bought from someone else, or if you used bitcoins to purchase goods or services, these transactions could be taxed.
It is classified as an asset, and trading principles apply to bitcoins. The best way to obtain bitcoin or other cryptocurrency is to purchase it through an exchange.