What is Bitcoin and How Does it Work?

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In 2009, a new currency entered the global financial sector to revolutionize payments and wealth control. This new financial system is known as Bitcoin. As a leading global cryptocurrency, the virtual coin has set the pace upon which other cryptos have been formulated and founded. 

Bitcoin’s global reach and acceptance have disrupted the traditional and rigid financial system, such that nations and individuals that had initially neglected the coin now align with its technology. 

Despite its criticism of lack of central control, Bitcoin has strived and remains relevant as digital money with the widest acceptance and relevance. Here’s how it works. 

What is Bitcoin? 

Bitcoin (BTC) is digital or virtual money (a cryptocurrency) invented and designed to serve as a payment network and enable the peer-to-peer exchange of funds. Bitcoin is the most popular cryptocurrency globally and remains the number one virtual coin or electronic cash to date. 

Evolution of Bitcoin (BTC) 

In January 2009, a pseudonymous personality, Satoshi Nakamoto, invented and launched the world’s largest cryptocurrency and called its name Bitcoin. Bitcoin is open-source software with a decentralized network. In 2008, before the launch of Bitcoin, Satoshi published a white paper on bitcoin.org titled – Bitcoin: A peer-to-peer Electronic Cash System, which became the modus operandi of Bitcoin. 

Bitcoin founder’s name and identity remain unknown, but the coin’s relevance remains unshaken. Although any Central Bank or government does not back Bitcoin as a legal tender, the virtual money’s popularity and successful launch triggered several other crypto programs.

How Bitcoin Works

In contrast to the traditional fiat currencies (such as CAD, USD, Euro, GBP, etc.), Bitcoin’s ideology and protocol is a decentralized network. As a result, users or holders of Bitcoin can transact without any middleman or intermediaries. This ideology is known as the peer-to-peer network. 

This protocol implies that you can send Bitcoin’s value tokens to another individual or people without using a bank or payment platform. However, to receive or send Bitcoin, the sender and receiver must have a Bitcoin wallet. 

Bitcoin is a digital or computerized file stored in a digital wallet. All Bitcoin transactions are recorded in a public ledger, known as the Blockchain.

Bitcoin Ledger – Blockchain 

A blockchain is literally a chain of blocks. A block in the crypto circle is a record of transactions and timestamps. Blockchain is a decentralized, digital, public ledger for all Bitcoin transactions. To date, the size of the Bitcoin blockchain file has exceeded 200 gigabytes. 

Bitcoin’s open-source software enables its 12,000 nodes or Bitcoin miners to work transparently in uniformity for a secure and decentralized system.

Bitcoin Mining

On January 3, 2009, the first Bitcoin mining, generally known as the “genesis block,” took place. Sequel to this, the first version of the Bitcoin software was released on January 8, 2009, which heralded the mining of other Bitcoin blocks, starting with Block 1.

Bitcoin mining is the process of adding Bitcoin transaction records to the Blockchain’s public ledger using computer hardware and software to solve computerized puzzles. For any blockchain transaction to be considered valid, it must contain a proof of work verified by Bitcoin nodes. 

Each verified transaction is added to the Blockchain by Bitcoin miners. The purpose behind Bitcoin mining is to ensure that transactions are impossible for a single entity to modify, as this is the core idea of the decentralized Bitcoin program. 

Bitcoin miners receive or earn Bitcoins as a reward for their efforts. Hence, moving a block is a method of introducing new Bitcoins into the system. 

Bitcoin mining requires electricity and some hardware, including:

  • Central Processing Units (CPU) mining. 
  • Graphics Processing Units (GPU) mining. 
  • Field-Programmable Gate Array (FPGA) mining. 
  • Application-Specific Integrated Circuits (ASIC) mining. 

How Can I Acquire Bitcoin?

You can acquire Bitcoin through any of the following methods:

  • Accept Bitcoin as payment for goods or services. 
  • Buy Bitcoins at Bitcoin exchanges using cash or credit card. 
  • Earn Bitcoins as a reward for Bitcoin mining using a computer and other specialized hardware. 

Bitcoin Transactions 

Compared to credit or debit card transactions, Bitcoin makes payment seem effortless, especially without the need for any intermediary or merchant. 

The first Bitcoin transaction took place in 2009 when Hal Finney, who created the first Bitcoin reusable proof of work, was given ten Bitcoins by Nakamoto following the mining of Block 1.

The first commercial Bitcoin/crypto transaction occurred in May 2010, when Laszlo Hanyecz, a programmer, bought two Papa John’s Pizza for 10,000 BTC. Laszlo is now famously known as the Bitcoin Pizza Guy.

Since this first commercial transaction, Bitcoin has been one of the most secure and fast payment channels for peer-to-peer transactions. 

As virtual money or electronic cash, users of the crypto must have secure storage, known as a Bitcoin wallet, to receive and store their coins. Bitcoin wallets are of different types, including:

  • Hardware or cold storage Bitcoin wallet. 
  • Mobile Bitcoin wallet. 
  • Desktop Bitcoin wallet. 
  • Hot, web, or online digital wallets.

Bitcoin Price and Value

Bitcoin’s value became evident recently when the richest man in the world (as of the time of writing) and CEO of Tesla, Elon Musk, tweets the digital coin’s cryptic endorsement. Bitcoin is the world’s largest cryptocurrency by market capitalization.

The value of Bitcoin comes from its usage as a means of exchange – a digital currency/money. With its growing user base, merchants, and exchanges, Bitcoin has a wide acceptance and adoption as a payment solution.

Like gold, silver, and fiat currencies, Bitcoin has the complete functionality and characteristics of money, including 

  • Durability
  • Portability
  • Scarcity
  • Fungibility
  • Divisibility
  • Recognisability. 

The only difference is that Bitcoin (BTC) uses mathematical properties, unlike fiat currencies’ physical properties.

Bitcoin Price Determinants

The price of Bitcoin is famous for its volatile nature. Bitcoin’s price depends on the demand and supply of the crypto. The law guiding Bitcoin’s value and the price is: the higher the demand for Bitcoin, the higher the price, and when the demand is low, the price of Bitcoin will fall. As of writing on February 22, 2021, Bitcoin’s price stands at CAD 60,697.96 (USD 48,095.90).

How Safe Is Bitcoin?

Bitcoin’s price and value have gone up and down since its creation in 2009. The volatile nature of Bitcoin has revealed that there’s a need for caution when investing in cryptocurrencies. The recent surge in Bitcoin’s price could maintain its bullish nature and could also drop its price at any moment.

Although Bitcoin transactions are recorded in a public ledger, it has a private security measure, such that nobody would know how you spend your coins unless you reveal it to them.

However, if you don’t safeguard your funds, you can lose your Bitcoin wallet or the entire coins to hackers as Bitcoin is challenging to track.

Bitcoin’s Acceptability in Canada

Over the years, Bitcoin has become one of Canada’s most popular payment solutions and across the globe. The following are some of the Canadian merchants and companies that accept Bitcoin payments:

  • Visa
  • MasterCard
  • Paypal
  • Microsoft
  • Royal Bank of Canada (RBC)
  • KFC Canada
  • Shopify
  • Tesla

Pros of Bitcoin

  • Transactions are transparent with no intermediary or hidden information.
  • It has high security.
  • It is digital money with global acceptance and accessibility.
  • Bitcoin transactions have low and transparent transaction fees.

Cons of Bitcoin

  • The decentralized nature of Bitcoin makes sit unregulated and risky.
  • BTC prices are volatile – you could lose all your investments within minutes.
  • It can be used for fraud and embezzlement, as transactions are difficult to trace.

Bitcoin Alternative Cryptos

The successful launch and acceptance of Bitcoin (BTC) encouraged the design and launch of thousands of other crypto projects, including:

  • Ethereum (ETH)
  • Litecoin (LTC)
  • Monero (XMR)
  • Cardano (ADA)
  • Bitcoin Cash (BCH)
  • Polkadot (DOT)
  • Stellar (XLM)
  • Binance Coin (BNB)
  • Tether (USDT)
  • Tron (TRX)
  • Dogecoin (DOGE)
  • Ripple’s XRP (XRP)
  • Raven Coin (RVN)
  • Ethereum Classic (ETC)

Conclusion

Bitcoin remains the world’s largest crypto by market capitalization and has the widest acceptability. Bitcoin is not yet accepted as a legal tender in any country, but the coin has established its relevance among merchants and individual crypto enthusiasts.

The digital coin is not without errors, and many new crypto projects have strived to improve the flaws of Bitcoin.

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Kareena Maya

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Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.