Bitcoin 101

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Introduction

In the past decade, cryptocurrencies have been considered the biggest thing that has happened in the world of finance. Bitcoin, in particular, is the most spoke crypto, especially after the mighty boom it went through at the end of 2017. Even if you are not willing to make investments in this space, it is essential to know about Bitcoin, its properties, and the way it works. Because, ultimately, it is going to change the way we transact money in the near future.

What is Bitcoin?

Bitcoin is currently worth thousands of US dollars but is not made of any precious metal. In fact, we can’t even see or hold this coin. We can’t even store it in a bank’s locker. Bitcoin is the world’s first scalable digital currency, and it only exists in any of the electronic devices that it is stored. The working of a Bitcoin way different from how the fiat currency works.

Bitcoin, unlike fiat currencies, is not a property of any government. No organization or authority has the right to decide the supply and demand for Bitcoins. Also, no single institution or company keeps track of these Bitcoins. Typically, for a fiat currency, the Federal Reserve or respective Central Banks investigate any fraudulent transactions that happen. But in the case of Bitcoin, all of that is governed by software with no human interference at all.

How are Bitcoins Generated?

Bitcoins are rewarded to the miners who are willing to take the responsibility of the network maintenance. These miners are presented with a complicated math problem where the solution can only be generated by using high powered computers. Once the right solution is generated, miners are rewarded with a certain amount of Bitcoins. In total, there will be only about 21 Million Bitcoins, after which the supply is capped. It is estimated that the last Bitcoin will be mined by the year 2140. It is clear that the value of Bitcoins increases with time. It works on the basic economic principles – supply & demand.  

Unique Properties of Bitcoin

Bitcoin is a cryptocurrency that is different from fiat currencies apart from just being virtual. Though both are used for transferring and making transactions, bitcoin has some unique features on its own. Below are some of the main characteristics Bitcoin possesses.

Decentralized system

The most important and that makes bitcoin stand out from the fiat currencies is that it is decentralized. That is, is no single entity that controls the Bitcoin network. It is powered by blockchain technology, which is run by an open network of dedicated computers (nodes) spread across the world. Hence, unlike fiat currencies, no bank or government is acting as a middleman in the case of Bitcoin.

Supply is limited

In fiat currencies (US Dollar, Euro, Yen, etc.), the supply of currency is unlimited. This means that the central bank can release as much quantity of currency they want. They can even manipulate the value of a currency relative to others. And this must be accepted by the citizens.

But, with Bitcoin, the supply is limited. This is made possible by a tightly controlled underlying algorithm. The supply of Bitcoin is fixed at 21 million. So, Bitcoins can be mined until it reaches the given value. Thereafter, the supply of Bitcoin will be stopped. This, hence, proves to be an attractive asset class in theoretical terms. If the demand grows and the supply remains stagnant, the value will simply increase.

Not Anonymous but Pseudonymous

While sending money through traditional means, the complete identity of the sender can be identified. But, in Bitcoin transfers, the operations are carried out semi-anonymously. Since there is no central verifier to validate the transactions, users need not identify themselves when sending and receiving Bitcoin. The Bitcoin protocol is written in a way that it checks all the past transactions of the sender. It then confirms if the sender possesses necessary Bitcoins and also the authority to send them. The identity of him or her is irrelevant here.

Immutable

Another strong characteristic of Bitcoin is that transactions cannot be reversed like fiat currencies. In the Bitcoin network, there is no central authority who has the ability to reverse the transaction. If the transaction has been recorded and confirmed on the blockchain network, it is impossible to modify the transaction. In other words, the transaction made through Bitcoin cannot be tampered with.

Moreover, the users of Bitcoin are identified by the address of their wallet. And all addresses in the system are unique. So, they act as a fingerprint of a user.

Highly Divisible

Satoshi is the smallest unit of Bitcoin. Its value is one hundred millionths of one Bitcoin (0.00000001). So, this would enable micro transactions to take place electronically that is not possible with fiat currencies.

Transaction Speed

The transactions made over the Bitcoin network are processed almost instantaneously. The payments are confirmed within a few minutes of transaction initiation. So, it takes just a few minutes to transfer money from one part of the world to others. But, in the case of bank transfers, it usually takes several days to make international transactions.

That’s about Bitcoin and its properties. This article is an attempt to make you understand the fundamental of Bitcoin. Stay tuned for more exciting and informative content. Cheers.