What is Bitcoin, and how does it work?

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What is bitcoin, and how does it work?
What is bitcoin, and how does it work?

It has been more than 12 years now that the virtual currency in bitcoin made its way into the cryptocurrency world – and needless to say, it has made quite a mark.

The cryptocurrency market is quite popular now, and bitcoin can take quite a bit of credit for this being the case. Of course bitcoin in itself has seen a roller coaster ride in terms of its valuation being on the rise and on the low in a rather surprising and quick fashion. The unpredictability with which the currency is approached is perhaps one of the major reasons why so many people have been successful in making big bucks due to it.

But essentially, many people actually find it quite difficult to understand exactly what bitcoin actually is and exactly how it goes on to work. So here, we will have a look at how bitcoin works and things that you need to know if indeed you too have developed curiosity when it comes to the cryptocurrency.

There has also been quite a bit of criticism that has been thrown at bitcoin due to its somewhat volatile nature as well as due to the fact that the currency has been known to be used for illegal payments and is known to be used as a means of payment on dark web, too. 

Essentially, what is it?

Bitcoin is often described as a cryptocurrency, virtual currency or a digital currency and it happens to be a type of money which is completely virtual. Think of bitcoin as an online version of cash – because in many ways – it is in fact just that. However, while it may be termed as an online version of cash – it doesn’t at all have the same liquidity factor as cash does.

Indeed while cash is readily accepted as a means of payment wherever you go across the globe, the same cannot actually be said about bitcoin. Many shops and online avenues have disabled bitcoins as a means of payment, while some countries have actually banned the currency altogether. 

Nonetheless, coming back to the point, bitcoin is indeed a virtual currency. Therefore, the physical bitcoins that are actually seen in pictures just happens to be a novelty. Indeed without the private codes printed inside them, they would be worthless. 

How does bitcoin work? 

Each bitcoin just happens to be a computer file which is stored in a ‘digital wallet’ app on either a smartphone or indeed a computer. Not only can people send bitcoins (or part of one) to your digital wallet, but you can do pretty much the same and send bitcoins to other people. 

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Every single transaction that goes on to take place happens to be recorded in a public list which is termed as the blockchain. It is because of such proceedings that there exists the possibility of tracing the history of bitcoins and also due to such circumstances, people are stopped from spending coins which don’t belong to them and they are also stopped from making copies of undo-ing transactions. 

How do you get a hold of bitcoins?

There are three major ways thereby which you too can become the holder of your very own bitcoins. The three major ways in which people go on and obtain bitcoins is either by buying bitcoins using real money, it by selling things and hence letting people pay them in bitcoins or such bitcoins can also be created via the aid of a computer.

How are new bitcoins created?

So as to make the bitcoin system work, people can actually make their computer process transactions for pretty much everyone. The computers are actually made to work out incredibly difficult sums and occasionally, they happen to be rewarded with a Bitcoin for the owner to keep.

People have developed the habit of setting up powerfully computers in an attempt to get their hands on bitcoins. Such a process happens to be termed as mining.

The problem nonetheless is that the sums are actually becoming more and more difficult to stop too many bitcoins being created. So the fact of the matter is : even if you start mining today, it could be years before you get a single bitcoin. And even if you do end up obtaining a bitcoin via the long and tiring process of mining, the cost of electricity of running the computer for all that time might end up as being more the value of the bitcoin itself.

Why are they valuable?

Of course it isn’t just money that we as humans consider valuable, as many other things such as gold and diamonds too are quite valuable. The value that is created by bitcoin and indeed all other things is due to the fact that people are willing to exchange them for real goods and services – and even cash.

Essentially, people want bitcoin because of many reasons. A vast majority of people consider bitcoin as being a viable option due to the fact that it is not controlled by the government or the banks.

Also, the fact that people can spend their bitcoins fairly anonymously is also a rather attractive point for many. While the transactions that occur are indeed recorded, nobody would know which ‘account number’ was yours unless you told them.

Are they worth it?

As mentioned above, bitcoins continue to divide opinions. While on the one hand the cryptocurrency does in fact represent an avenue for people around the internet to pay for things in a rather anonymous manner, the volatile nature of the currency means that the risks associated with its value might just be too great for it to considered as a permanent payment method : at least for now, that is.

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