What is bitcoin & how does it work?

 What is bitcoin?

Wondering what bitcoin is? Bitcoin is a Cryptocurrency that, since 2008, has allowed online users to transfer digital money, thereby completing a series of transactions.

The creator of bitcoin is Satoshi Nakamoto (a pseudonym), and his idea was to securely transfer digital money from person to person (peer to peer) without intermediaries such as a bank, government, or other external institutions.

Bitcoin

It is thanks in part to this that the value of bitcoin continues to rise, although the number of bitcoin will not exceed 21 million. Bitcoin is also very often referred to as digital gold and hides under the acronym BTC (now you are sure what BTC means).

How Bitcoin work?

Each bitcoin transaction (purchase of one bitcoin) is recorded on a so-called blockchain, which only resembles a bank register - each block contains information on the date, time, and amount of the transaction.

This register is not maintained by any external institution or server - it is managed by a network of decentralized computers. Their high computing power is used to create new blocks (this answers the question of what is bitcoin digging.

Bitcoin digging

Since the very beginning of Bitcoin's creation, its target quantity of 21 million BTC in circulation has been known. Once the network has generated 21 million BTC, it will stop generating more.

 Bitcoin is mined based on the operation of properly configured excavators, optimized to solve advanced mathematical problems.

How does Bitcoin work?

A person who wants to mine bitcoins must have a powerful computing unit to become a viable and efficient node of the bitcoin network.

Apart from this, a bitcoin miner should have a wallet application installed. It is in the full wallet that he has access to the entire blockchain, i.e. the transaction records placed in the dug blocks.

Bitcoin miners

In order to increase the efficiency of mining - to increase the Hash rate, advanced devices optimized for the execution of specific algorithms are used.

These are Cryptocurrency miners or ASICs. These devices are used to solve specific mathematical tasks (SHA-256). The performance of cryptocurrency miners is measured in hashes per second (Hash/s).

At the moment, digging bitcoin on your own is difficult and unprofitable. Therefore, mining pools were created, which unite people who mine bitcoin.

Group mining is intended to increase computing power and thus increase the possibility of obtaining Cryptocurrency. It is also a form of protection when the value of the bitcoin falls.

When the value of a Cryptocurrency falls, people who mine alone usually abandon further mining as it becomes unprofitable.

What is the block reward?

Bitcoin mining is associated with the term block reward. This is the amount of Cryptocurrency that the owner of the node providing the computing power receives for each new block created in the blockchain network. The block reward is visible in the bitcoin wallet.

Security of bitcoin currency value - or what is bitcoin halving?

As the amount of this Cryptocurrency is limited, it is considered to be an exhaustible resource. The risk of a decline in the value of this Cryptocurrency is then reduced.

Security Of Bitcoin

Another factor affecting the limitation of bitcoin's availability is halving. The principle of bitcoin halving is a mechanism that reduces the reward for mining a new block by half.

Halving bitcoin is a phenomenon that occurs approximately every four years.

Bitcoin's strengths and weaknesses

Bitcoin (BTC) is digital money that cannot be manipulated in any way and its value cannot be inflated. A Cryptocurrency investor can buy just a fraction of a bitcoin and then make money with it on a Cryptocurrency exchange. Many other cryptocurrencies have been created since the advent of bitcoin (BTC), but it is bitcoin that has the greatest financial and market potential.

Bitcoin's advantages:

Speed of transactions: Payments with bitcoin are made over the internet network. Transactions from even the most remote places in the world are approved every 10 minutes.

Security: Every transaction made with bitcoin is encrypted by the SHA-256 mixing algorithm, which is the most secure in the world.

Availability: Transactions can be made 24 hours a day, regardless of the day of the week.

No intermediation: P2P system, i.e. transactions without the intermediation of banks and parent institutions;

Anonymity: the virtual money owner is not required to have a bank account. Payments are made from a bitcoin wallet. Setting up a wallet does not require filling out a data form, as is the case with traditional bank accounts, which means that in the Bitcoin network we can remain anonymous;

Decentralization: In the Bitcoin network there is no overarching organization that can stop or permanently blocks a transaction, the network is based on independent nodes that independently confirm transactions. In the blockchain, each user is their own bank.

Limited quantity: the maximum supply of Bitcoin is limited to 21,000,000 dug units of the currency. This unique feature has a very positive effect on the Bitcoin exchange rate and, unlike fiat currencies, prevents inflation.

High value: Bitcoin is perceived as a store of value because its price has been increasing in a broad perspective (despite drastic corrections) and is not subject to the phenomenon of inflation. As the first Cryptocurrency, it is endowed with special trust from institutions and investors, which is positively reflected in the prognosis of its price.

Disadvantages of Bitcoin:

Anonymity: This is both an advantage and a disadvantage of bitcoin - for governments, anonymity in the trading of funds is a huge problem as it can enable illegal behavior by citizens.

However, it is worth remembering that transactions in bitcoin (despite the apparent anonymity) are traceable!

Lack of immunity to quantum computer computing: Bitcoin, unlike newer generations of cryptocurrencies, is in theory vulnerable to the malicious use of quantum computers.

This has to do with the 51% attack theory, which occurs when 51% of bitcoin's network is taken over. In addition to taking over the network, quantum computers were also supposed to have enough computing power to crack the SHA-256 mixing algorithm, which could lead to private keys based on the address and public keys.

In contrast, none of these concerns are currently valid, as quantum computers have a different specificity for solving tasks than computing units focused on executing a single algorithm (e.g. application-specific integrated circuit).