What is Bitcoin and How Does It work?

Bitcoin Still Remains the Safest and Most Secure Network

Bitcoin, which served as the point of introduction for cryptocurrencies, blockchain, and all the associated technology solutions we see today, remains the largest by all means. Also, the most secure of all cryptocurrencies because it has stood the test of time and exerted its dominance. The currency is not a liquid currency like regular fiat. It’s a virtual currency and has changed the way we see money today. Corporations, governments, and agencies around the world now see money in a new light, and bitcoin, via its blockchain technology, proposes a new way to help people handle funds.

 

Satoshi Nakamoto created Bitcoin— a name you would think is the true identity of a particular person if you are new to cryptocurrency and all related discourse. However, the identity of the creator of bitcoin is unverified, so it’s hard to confirm if ‘Satoshi Nakamoto’ is a real name or a pseudonym used to conceal the creators’ identity as they might likely be more than one person. It is said that other versions of cryptocurrencies had been launched before Bitcoin became public, but they never became available to the public before Bitcoin.

 

Bitcoin is the most valued cryptocurrency, but funny enough, in 2010, a year after Bitcoin was launched, a person named Laszlo Hanyecz bought two pizzas with 10,000 bitcoins. Today, I hope that person remembers how it tasted because 10,000 bitcoin is now worth over $400 million. Bitcoin gained popularity over the years before blowing up around 2016. The popularity was fostered by the creation of other blockchain networks like Litecoin, Ethereum, etc. Initial Coin Offerings offered people the opportunity to invest in these currencies, and since bitcoin was the first cryptocurrency, it owes its popularity and value to that fact. There was the craze about cryptocurrencies around this period as a lot of people became aware of the potential that blockchain poses to financial structures.

How Does It Work?

Bitcoin operates on the blockchain network, which is a safe and secure public ledger where all transactions using bitcoin are recorded. This means no transaction goes unnoticed on bitcoin. Today, there are millions of daily transactions on the network, but you can easily find the details of each if you needed. The ledger is accessible to everyone and, in the process, still maintains user identity.

 

It is referred to as a decentralized network because of how open it is. Unlike what you would have in banks and other central bodies, where there is a third party to approve transactions, there is nothing like that with blockchain. The users validate transactions carried out on the network as the network operates on nodes operated by several computers from places across the world. Any transaction carried out on the network is validated and recorded in these nodes. Users and validators cannot be fraudulent on a network like this because whatever happens is visible to everyone. Blockchain fundamentals are pretty straightforward.

 

A blockchain is made up of a single chain of chronologically ordered discrete data blocks. In theory, this data can be any string of 1s and 0s, meaning it could include emails, contracts, land titles, marriage certificates, or bond trades. This is a typical technology that can be used to establish a contract between two parties as long as they agree to it. It eliminates the need for a third party and opens up several other possibilities for industries other than the finance sector to tap into.

 

In addition to its decentralization feature, the network is exceptionally secure. First off, users do not create wallets or accounts with any private information, so you cannot tell which wallet belongs to someone unless they go about claiming ownership. Blockchain is protected with cryptographic technology that allows users to have their own secure keys. This technology keeps the bitcoin network very safe as users’ private keys serve as a digital signature or identity. If you lose the private key to your bitcoin wallet, there is no way you would ever be able to recover it— that is how tamper-proof the network is, and if you do not share your private keys with anyone, you will not have security issues.

 

Blockchain is the native home to bitcoin’s network Still, the emergence of other networks like Ethereum adopted blockchain’s technology, and now blockchain serves as a general name for these networks rather than bitcoin’s parent site. Bitcoin’s current aim is to serve as a store of value and a payment system. There are no restrictions to using the blockchain technology for other reasons in the future. However, consensus would be required to include these different systems in Bitcoin. For example, Ethereum project’s primary objective is to provide a platform where these “smart contracts” can occur, allowing for creating a whole new world of decentralized financial goods without the need for middlemen, fees, or the risk of data breaches that come with them.

 

There are users known as miners who specifically do the job of creating new blocks of transactions and validating transactions. They solve highly cryptographic math puzzles to audit transactions on the blockchain network and earn rewards for it. However, that’s an entirely different story.

What Determines The Price of Bitcoin

For people new to cryptocurrencies, you will be amazed at the news of bitcoin’s price falling and rising, but it is basic supply and demand. Like fiat currencies, bitcoin’s price is determined by supply and demand. No government controls Bitcoin, and the decentralized nature creates skepticism among people who enjoy the stability other currencies get from government policy and support. Bitcoin is a volatile currency and could gain or lose a lot of value in a matter of hours.

 

However, bitcoin has been around for more than a decade and is conveniently stable compared to other cryptocurrencies. There can only be 21 million bitcoin in supply and just over 18 million bitcoin is currently circulating. The remaining has to be earned via mining. Bitcoin’s price is mainly determined by market pressure to buy bitcoin. Its current supply creates scarcity, and the flow of new bitcoin into the market via mining is slow. This increases the stock-to-flow ratio of the cryptocurrency and exerts its scarcity.

Every four years, the amount of bitcoin earned via mining is halved, and this causes demand to outpace supply. Also, there is investor’s confidence in its value, and people are more inclined to acquire the asset rather than sell. The price depends on many factors, but what is important to note is that the price cannot be manipulated.

Conclusion

Cryptocurrency has made its point in its few years of existence. It is believed to have great potential for the future. The cliche “The future is decentralized” is a testament to how much belief humans have in blockchain. The crypto market capitalization is over $2 trillion, and hundreds of projects have been launched on the very same skeleton that formed blockchain. Bitcoin is not hard to understand once you read an article like this.

 

We are not in the position to advise people on what to invest money on and what not to. It is best to do due diligence and find resources online to help you understand. This article only seeks to educate the reader on bitcoin and its promising parent network.

Written by Eduard Smith