What are Bitcoins and How Do they Work?

What are Bitcoins and How Do they Work?

What are Bitcoins and How Do they Work?

The million dollar (or 166 BTC question) everyone is asking right now is, “what is bitcoin?” Other common queries are, “Is it truly as revolutionary as people claim?” “What makes it so unique?” Finally, you must’ve heard everyone’s favorite, “how do I buy and sell bitcoins?”

This post is a brief exposition of the topic of cryptocurrencies, the underlying technology- blockchain, and how it works.

What is Bitcoin?

In the year 2008, a computer programmer who operated incognito published a paper using the pseudonym, Satoshi Nakamoto. In the whitepaper, he explained the concept of peer-to-peer networks and how blockchain can be leveraged for transactions of a particular nature. The brainchild of this project is now known as Bitcoin.

Before we describe the seemingly erudite modus operandi, let’s start with a simple analogy which you can relate to. How do you send emails? Let’s outline the steps below.

  1. You create an email address
  2. You input the recipient’s address.
  3. You fill in the required details of the message
  4. You click send.

As simple as this sounds, transactions regarding bitcoin are done in a similar manner, there are just two exceptions.

  1. Normally, your email hosting service is responsible for the email delivery and they affect the transmission as quickly as possible. With bitcoins, this is not the same. There are several people known as miners who solve cryptographic problems to confirm your transaction.
  2. Some email hosts allow you to retrieve the content of your message or alter it as you deem fit. However, transactions involving bitcoins are immutable and stored on an open, distributed ledger.

Easy, right? You’re on your way to becoming a blockchain expert. Good job. Now, you know the basics, let’s go into details.

How are Bitcoins Created?

Have you ever come across the word “mining”? You might be well acquainted with mining of mineral resources but in the world of cryptocurrency, mining refers to the process in which transactions are confirmed and added to the public ledger. This is also the way new bitcoins are released for our use.

The process of bitcoin mining is one of the ways in which cryptocurrencies are superior to fiat currencies. Dollars and Pounds can easily be counterfeited, they are also cumbersome to handle (You can have a million bitcoins in your pocket). Apart from these reasons, only 21 bitcoins will be in circulation and the process of mining bitcoins will halt in 2040. This is a perfect strategy aimed at controlling demand and supply.

How Do You Store Bitcoins?

bitcoin mining

Remember that bitcoins are digital assets and are intangible? Even though you do not enjoy the luxury of holding, seeing, and admiring your wealth, you get to view it on a screen. One popular argument is that cryptocurrency keeps you safe during robberies and physical attacks. However, storing bitcoins is not without its pitfalls.

There are two methods of storing bitcoins.

  1. Cold Storage
  2. Hot Storage

Although we have other classifications which comprise desktop wallets, mobile wallets, and paper wallets, these two are the major forms of storage.

Cold storage involves you storing your currency in a piece of hardware which is usually not connected to the internet for long. Hot storage, on the other hand, involves storing it on a platform online. This is usually when you use bitcoins for regular trades. There are various forms of fraud- phishing, hacking into your device, etc. if you’re dealing bitcoins, you should be safety conscious.

Trading Bitcoins

This is where it gets exciting, right? Making profit buying and selling bitcoins? Unlike conventional financial institutions, bitcoin leverages the peer-to-peer trading system. Using smart contracts, transactions are verified, authenticated, and recorded on the ledger. In order to start trading bitcoins, you will need to sign up on any of the popular exchanges out there.

Make sure you look at the reputation of the exchange before putting in your financial details as there are several fraudulent schemes. For any transaction to go unhitched, make sure you provide the accurate address.

The Value of Bitcoins

cryptocurrency

The value of bitcoins is one topic on the lips of every analyst, trader, and spectator. In December 2017, Bitcoin reached an all-time high, peaking at close to $20,000. However, 2018 has seen it go through tough times and one BTC is now worth around $6000.

Conclusion

This is yet another way in which technology is radically disrupting the status quo. Experts posit that in a few years, bitcoin will displace existing currencies and become a globally accepted currency. Only time will tell.

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