Can you imagine something that was worth nothing ten years ago and is worth thousands of dollars now? Of course, we’re talking about Bitcoin, which recently reached an all-time high price point and is again making headlines in the market and the media.
Therefore, we decided that now is the time to understand what Bitcoin is and whether it is legal.
What is Bitcoin, and how does it work?
Bitcoin is the first virtual currency in the world that uses public key cryptography to record, sign, and send transactions across the blockchain without any intervention from the central government. Bitcoin eliminates the need for third parties to participate in financial transactions.
Under the identity “Satoshi Nakamoto”, an unidentified computer programmer or group of programmers created the Bitcoin network in January 2009. The web is a peer-to-peer electronic payment system that uses the bitcoin cryptocurrency as a medium of exchange or a store of value, similar to gold and silver, through the internet. Since each bitcoin has a value of 100 million satoshis, it can be up to eight decimal points.
Let’s find out what is the meaning of Bitcoin. The words “bit” and “coin” are combined to form it. There is no accepted method for capitalization when referring to bitcoin; some sites use bitcoin in capital letters to refer to the technology and network and bitcoin in lower case to refer to the unit of account.
Several municipal and national governments have recognized bitcoin as legal cash, including El Salvador and the Central African Republic.
What is Bitcoin used for?
This cryptocurrency is used as virtual money. In essence, bitcoin is a form of payment that any person or organization does not control. It can be bought on several exchanges, such as Binance.
Bitcoin’s Blockchain Technology
Before moving onto blockchain technology, first, we must understand what a block is in bitcoin. The information stored in the blocks on the blockchain is encrypted by Bitcoin using the SHA-256 hashing algorithm. A 256-bit hexadecimal number is used to encrypt transaction data stored in a block.
All transactional information and details related to blocks before that block are stored in that number. Of course, one must be knowledgeable in computer science and advanced mathematics to understand this. But if you want to start trading or investing, then having a basic understanding would be enough.
But what is blockchain in bitcoin? Let’s use bitcoins as an example.
A “ledger” is the one public digital account containing all of the bitcoin transactions. Every system part of the Bitcoin network has a copy of this ledger, and individuals who operate these systems are known as “Miners”. Verifying transactions is the miners’ responsibility.
Let’s follow a step-by-step process to understand how bitcoin works:
- Let’s say A needs to send two bitcoins to B’s account.
- Whether or not A has two bitcoins in his account must be verified by miners.
- Miners must resolve a challenging mathematical problem to finish the transaction. There is a distinct variable for each bitcoin transaction.
- The miners are responsible for computing it, but they are not expected to sit down with a pen and paper and solve the calculations. Computers do all calculations.
- Once the equation has been solved, the network’s other computers verify it, and the transaction is added to the chain.
- A set of transactions are gathered together. Therefore, the technology is known as a blockchain.
The miners need computers with very complex and high processing power because all of these computations are carried out automatically on the machines because of their extreme complexity and crore-based combinations.
How to mine Bitcoin?
A bitcoin miner will first choose and set up their working tools. These consist of:
- Graphics processing unit (GPU).
- Application-specific integrated circuit (ASIC).
- SSD for mining.
- Software for mining.
- Mining Pool (Favourite one).
Once everything is set up and the system is running, it starts the mining process on its own. Further human engagement only occurs when a system or network fails, there is a power failure, or the system needs regular maintenance.
However, solo miners are often at a disadvantage because they cannot compete with large ASIC mining farms. But there is a way out; such miners combine their computing power, i.e. join the mining pool.
When you join a mining pool, you increase your chances of earning rewards. However, it is significantly reduced, as it is divided among all miners.
Components of Bitcoin transactions
Three things happen when a transaction is started on the bitcoin network:
- Transaction input.
- An output of a transaction.
- The value of the transaction.
A bitcoin mining program creates a unique cryptographic hash problem for each transaction input that is challenging to crack. The amount of transactions necessary to create a block is then organized into a Merkle tree by the program.
The SHA-256 algorithm and the Merkle Tree
The hashes in a block are arranged into a Merkle tree, a summary of all the transactions. The SHA-256 algorithm repeatedly pairs transaction IDs, or individual transaction hashes, in the Merkle tree until one hash uniquely identifies the tree as a whole. The Merkle tree makes it possible for the bitcoin network to verify transactions efficiently.
Miners will seek to calculate a block’s hash by continuously adding a block header until the hash value is less than the target to solve the hash problem. A new block is successfully formed after a mining machine solves the problem and is validated in the Bitcoin network after an agreement among the nodes. After being validated, a block is added to the chain, verifying the transactions it includes.
How do you buy Bitcoin?
You can use your credit/debit card or another payment method to purchase bitcoin on a cryptocurrency exchange. You can buy not all but part of BTC. For example, you can buy half a bitcoin from Coinbase or Bitcoin.com by creating an account and funding it.
A bitcoin address look something like this: 3J57t1XpEZ73CZmQvfksriyiWrnqLhGTLy.
How is Bitcoin used?
Everyone is eager to understand what bitcoin is used for today. Bitcoin was developed to send money over the internet. The goal of digital currency is to offer an alternative payment method that can function without centralized management but is otherwise utilized much like traditional currencies.
Many businesses, shops, and stores accept bitcoin as payment for goods and services. You need to have a cryptocurrency wallet to use bitcoins. The private keys for your bitcoin are stored in wallets and must be entered when making a transaction.
Speculating and Investing
As bitcoin gained popularity, investors and speculators developed an interest in it. Bitcoin sales and purchases were made possible by the development of cryptocurrency exchanges. Prices started to increase, and demand climbed gradually up. Many people began buying bitcoins because they thought the price would keep rising.
Is Bitcoin a good investment?
Before investing in a bitcoin, you must know whether it is legal or not. Due to the traditionally low price connections that cryptocurrencies like Bitcoin have, owning some can help you vary your portfolio. If you think that people will use cryptocurrencies more regularly in the future, it makes sense for you to purchase some as part of a well-diversified portfolio directly.
Be careful to have an investing strategy explaining why every cryptocurrency you invest in will survive the test of time. You ought to be able to manage the investment risk as part of your overall portfolio if you conduct sufficient research and learn as much as you can about how to invest in cryptocurrencies.
Bitcoin will become much more stable as it develops, making it easier to transfer and a store of value that will increase its use by businesses, the government, and everyone else in daily life.
Although bitcoin is still in its “adolescence” and some people are still suspicious of it, it is here to stay, has been integrated into our lives, and will eventually become a universally accepted form of payment. It is simply a question of time. The acceptance of cryptocurrency and how often it is mentioned indicate that it has a bright future.
The information in this article is not investment advice and is available for educational purposes only.