What Is Bitcoin And How Does It Work? - Bitcoin Price

Bitcoin is a digital currency -- also called cryptocurrency -- that can be traded for goods or services with vendors that accept Bitcoin as payment. With Bitcoin, holders can buy, sell and exchange goods or services without a central authority or bank as an intermediary.

Bitcoin

Bitcoin is one of the most well-known virtual currencies today, with its value rising dramatically since its launch in 2009. Satoshi Nakamoto, the pseudonym of Bitcoin's creator, stated the purpose of Bitcoin is as an electronic payment system that is based on cryptographic proof, instead of trust. Some holders buy bitcoin as an investment, wanting it to increase in value, while individuals and businesses use or accept payments as currency. PayPal, for example, currently supports Bitcoin transactions, and the country of El Salvador has accepted Bitcoin as a currency.

Bitcoin-to-bitcoin transactions are made by digitally exchanging anonymous, heavily encrypted hash codes across a peer-to-peer (P2P) network. The P2P network monitors and verifies the transfer of bitcoin between users. Each user's bitcoin are stored in a program called a digital wallet, which also holds each address the user sends and receives bitcoin from, as well as a private key known only to the user.

In the U.S., bitcoin are controversial because they can be used to anonymously transfer illicit funds or hide unreported income from the Internal Revenue Service. Bitcoin policy now requires transactions that involve traditional, government-backed currencies to be attached to an identity.

By design, bitcoin supply is limited to 21 million coins of which 18.77 million have already been mined. This makes bitcoin scarce and controls the inflation that might occur if there was an unlimited supply of the cryptocurrency. According to the Gadgets 360 article titled "Bitcoin mining: How Many Coins Can Be Mined in Total and How Does It Impact Pricing?" 83% of all the bitcoin that will ever exist has already been circulated.  

How does Bitcoin work?

Bitcoin was built with a distributed digital record in mind called a blockchain. Blockchain is a type of public ledger -- a digital system for recording transactions and related data in multiple places at one time. Blocks in a blockchain are units that contain data about every transaction, including the date, time, value, buyer and seller, and an identifying code for each exchange.

Blockchain is designed to make it extremely difficult to hack the system or forge the data stored on it, thereby making it secure and immutable. Each computer in a blockchain network has a copy of the ledger to prevent single points of failure. If one block is changed, then all the other blocks in the distributed ledger must be changed. Blockchain is a decentralized technology, meaning it is not controlled by any one organization. In addition, identifying codes make it difficult to fraudulently produce blocks.

What is bitcoin mining?

Bitcoin mining is the process of adding new transactions into circulation. Bitcoin miners use software that accesses their processing capacity to solve transaction-related algorithms. In return, they are awarded a certain number of bitcoin per block. This entices cryptominers to keep solving the transaction-related algorithms, supporting the overall system. The process is called proof of work.

Originally, bitcoin mining was conducted on the processors, or CPUs, of individual computers, with more cores and greater speed resulting in more profit. After this, most bitcoin miners began using multi-graphics card systems, then field-programmable gate arrays and application-specific integrated circuits. These moves were made in an attempt to find more hash codes below a given target and use less electrical power.

It once was possible for anyone to mine bitcoin, but not anymore. Bitcoin code is written to make solving its transaction-related algorithms, or puzzles, more challenging over time. This means that solving these puzzles requires more computing resources. Access to powerful computers and large amounts of electricity is now a must. In the malware world, one of the more prevalent current threats is mining botnet infections, where user systems mine for bitcoin without the owners' knowledge and the funds are channeled to the botnet owner.

Why is bitcoin valuable?

Bitcoin has value similar to other currencies because others are willing to exchange them for goods, services and existing currencies. However, bitcoin's price has risen, fallen and risen exponentially again multiple times since its introduction in 2009. Many consider the swings to be volatile. The prices have risen and fallen in the stock market due to a number of factors, including companies adopting or dropping support for the currency, and even what celebrities are saying about it.

However, bitcoin's value is also derived from other sources. For example, for a currency to be accepted, it should have some form of scarcity, divisibility, transportability, durability and should not be easily counterfeited. Bitcoin has the following traits:

• It is limited to 21 million.
• It is divisible up to eight decimal points. The smallest unit, a satoshi, is equivalent to 0.00000001 bitcoin.
• It is stored in digital wallets, making it easily transportable.
• It is not physical, so it cannot be destroyed. However, it can be compromised if the hardware, software or cryptographic key to the corresponding wallet is lost.
• It is also protected against possible counterfeits by means of blockchain and cryptographic keys.

How is bitcoin used?

Bitcoin is often used as a payment option or as an alternative investment. As a payment method, bitcoin can be used to buy goods and services. Although the number of vendors that accept the cryptocurrency is still limited, vendors like PayPal and AT&T are starting to accept bitcoin payments. Electric car company Tesla has also gone back and forth in deciding to accept bitcoin payments. As a form of investment, individuals can invest in Bitcoin to help diversify a portfolio of stocks and bonds.

What are the risks of bitcoin?

The risks involved with bitcoin include the following:

Volatility in investments. Bitcoin does not have a long-term track record or history of credibility behind it. Prices rise and fall quickly, and well-known individuals such as Elon Musk have brought the value up almost 10% and caused it to decline by 5%, just by sending out tweets. In 2014, in one day, the price dropped by 80%.

No insurance. Bitcoin exchanges and wallets are not insured by federal or government programs. Unlike bank accounts, if something happens, it is unlikely that individuals will get their bitcoin back.

Suspect to ransomware. Because transactions are made digitally and anonymously, bitcoin is the currency of choice when hackers hold an unsuspecting victim's data ransom.

Regulatory restrictions. Bitcoin has also been used for black market transactions, which may invite government regulation to restrict it.