What is Bitcoin, and How Does Bitcoin Work?

By Israel S — Published January 18, 2018

What is Bitcoin, and How Does Bitcoin Work?

What is Bitcoin?

Bitcoin
(BTC) is one form of digital currency, which serves as an exchange medium for internet traders. Since this digital currency is created and based on the consensus-keeping process secured by strong cryptography, it is commonly called as cryptocurrency. Cryptocurrencies are built on cryptography. It is protected by math, not by people or trust.

Bitcoin is the first and most famous amongst the cryptocurrencies available in the market today. Its transaction volume reached more than 271,000 daily transactions.

Early history

Satoshi Nakamoto, is called the mysterious inventor of Bitcoin, the first and presently the most important digital currency in the market. In fact, he never intended to create a currency. On October 31, 2008, a whitepaper authored by Satoshi named "Bitcoin: A Peer-to-Peer Electronic Cash System" was published on bitcoin.org. Herein was stated he had developed "a new electronic cash system that was fully peer-to-peer, with no third party". This was the beginning of digital cash.

Satoshi Nakamoto in a way handed over the control to developer Gavin Andresen, before disappearing from any connection to bitcoin. Andresen became the bitcoin lead developer at the Bitcoin Foundation, formed in September 2012 and based at Washington D.C.

Background

Bitcoin is a decentralized electronic cash system that uses a peer-to-peer network to record transactions. This means that there is no server or central authority like a bank to monitor transactions. Therefore, every peer in the network has a list with all transactions to check if these are valid or an attempt to double-spend. So, every peer in this network chain has to agree for any transaction to be approved.

How to trade Bitcoins?

Bitcoin being a cryptocurrency is encrypted, thus cannot be manipulated. Encryption is the process of creating a set of mathematical algorithms, to scramble text that you want to keep secret. There are plenty of sites that sell small amounts of Bitcoins, less than $2k, with the proper storage "wallet". The popular ones are Kraken, CEX.IO, Coinmama, and Bitstamp.net. It is always better to seek expert advice before investing in cryptocurrency.

There are hundreds of special ATMs around the U.S. that dispense Bitcoins. They charge higher transaction fees than sellers online. Larger investors and traders can use exchanges which offer best commission rates. Even meeting traders in person through online sites helps, but is never advised nor recommended by us. Getting a job that pays you in Bitcoin could be the near future.

Bitcoin Future

The first ever and one of the famous Bitcoin transaction was when 10,000 BTC were used to indirectly purchase two Papa John's pizzas in 2010. Then it was valued at $20, but according to todays estimates it could be more than $121 million! (Today 1 BTC = $12,123)

Today from beer to real estate or anything can be on offer on Overstock.com. Experts advise it is most cost effective to pay with Bitcoins than convert it into cash, since in the U.S. that would accrue capital gains tax since the IRS considers Bitcoin as an asset, not currency.

Over the years Bitcoin has risen to become one of the major online cryptocurrency traded over the world. By mid-January 2018, Bitcoin miners reached a milestone as they mined the 16.8 millionth Bitcoin from the planned 21 million Bitcoins. It is reported that only 20 percent of total Bitcoins remain to be mined. It is estimated that Bitcoin will reach its final figure around 2040.

The price of Bitcoin soared to $17,900 by mid-December 2017, making many financial institutions and governments take notice. Some of the countries are thinking to regularize trading this cryptocurrency while few countries like China and South Korea are planning to ban it altogether. Nevertheless, the Bitcoin is here to stay.

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