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What Is Bitcoin?

After the 2008 financial market crash, affected investors and the general public sought alternatives to fiat, real estate, and stocks as they were the leading stores of value at the time. This need prompted Satoshi Nakamoto to develop the first cryptocurrency, Bitcoin. It did not receive a warm welcome at inception because the major players in the finance industry thought it was a scam. 

Over time, the critics began to trust the Bitcoin system after seeing the problems that it could solve in the global financial space. It is safe the say that the creation of Bitcoin opened heaven’s gate to what we now know as the crypto ecosystem. Bitcoin could be considered one of the most significant inventions globally, taking into account its past and present achievements.  

What Is Bitcoin? 

Bitcoin is a decentralized cryptocurrency or digital asset that allows the transfer of monetary value using encryption and cryptography. This means that Bitcoin is not regulated or governed by any central authority, unlike fiat currencies. 

It, however, uses a peer-to-peer (P2P) system to carry out transactions between parties. Bitcoin’s founder, Satoshi Nakamoto, believed that eliminating banks from handling transactions and replacing them with P2P systems that require no third-party confirmation will help increase the speed of transactions and create a better financial system.  

Today, Bitcoin rivals the most popular fiat currencies, including the US Dollar, Pound, and Euro, and was recently introduced as legal tender in El Salvador. At inception, Bitcoin value was almost negligible. However, CoinMarketCap data shows that the coin has grown to over $67,000 after a decade; no other store of value has achieved this level of growth. 

Bitcoin also tops the crypto market capitalization chart, with its value at $1.18 trillion. Plus, its market cap beats those of numerous top companies, including Apple, Microsoft Corporation, Alphabet Inc., JP Morgan Chase, and so forth. Analysts believe that Bitcoin will continue to stay ahead of its competitors owing to its strong network and functionalities.   

what i bitcoin

How Does Bitcoin Work? 

Several components drive every cryptocurrency. These components play significant roles within the network while also determining the level of acceptance. In Bitcoin’s case, the major elements that drive it include the algorithm, block time, total supply and transaction fees, and difficulty retarget.  

Algorithm and Blockchain Protocol 

A cryptocurrency’s algorithm is of utmost importance to users and miners because it determines the usability of the blockchain and, sometimes, the token’s price. The algorithm governing the Bitcoin network is known as the PoW (Proof-of-Work) protocol, and it is used to generate new blocks and authorize transactions within the network.  

Miners also leverage the PoW algorithm to compete amongst themselves and process more transactions within the network. As a miner confirms more transactions on the blockchain, his token rewards keep growing. 

Bitcoin created the PoW’s initial framework to serve as a tool for producing tokens and confirming transactions, and it employs the SHA-256 hashing algorithm. This hashing algorithm is highly complex and significantly hard to compute, leading to the slow confirmation of Bitcoin transactions. It also gives room for healthy competition between miners on the blockchain. However, the downside is that miners can only remain profitable when they utilize robust and highly efficient mining tools. 

Block Time 

Block time is the speed at which the block of a cryptocurrency is produced. Over the years, Bitcoin has experienced highly volatile block times in the region of about 10 minutes. In a worst-case scenario, it takes about 15 minutes for a Bitcoin block to be produced. The slow transaction time within the Bitcoin network has been a persistent problem, and it has, in turn, affected Bitcoin’s scalability. 

Total Token Supply and Transaction Fees 

Satoshi programmed the Bitcoin blockchain to generate a total of 21 million BTC. As of writing, about 18.85 million BTC is in circulation, meaning that approximately 89.8% of the entire Bitcoin allocation has been mined. 

Furthermore, Bitcoin’s transaction fees fluctuate because they are dependent on the transaction size, thereby attracting numerous criticisms to the network. Bitcoin has once recorded a transaction fee of close to $55 at its peak; however, YCharts statistics show that the average transaction fee on the blockchain is $4.208. 

Difficulty Retarget 

A cryptocurrency’s difficulty measures the difficulty involved in finding a hash that is lower than the target given by the system. Bitcoin has a retarget frequency of 2016 blocks, meaning that the network difficulty changes after every 2016 blocks, and this happens approximately every two weeks. 

There have been cases whereby the computing power within the Bitcoin blockchain diminishes drastically because the number of miners on the network is insufficient. When this occurs, block time will be slower until the next retargeting date.  

The difficulty retargeting in the Bitcoin network is stable compared to other tokens because it takes longer. For instance, if a miner links a highly powered CPU to the Litecoin blockchain on a particular day and removes it, the absence of that same CPU power during the remainder of the retargeting window will alter the network’s difficulty.  

An unstable difficulty will spell doom on any blockchain as if hash power is affected. If the difficulty is lower than the CPU power in the network, blocks will be produced faster, leading to inflation and low security.  

Also, having a low difficulty compared to the CPU power will slow down block production, leading to slow transaction speed. The instability may also lead to chain hopping. This refers to a situation whereby cybercriminals can move funds from one cryptocurrency to another via online exchanges. 

Advantages and Disadvantages of Bitcoin 

As mentioned earlier, Bitcoin has brought numerous breakthroughs within the global finance space; however, it has its disadvantages. This section aims to explore the pros and cons of using or investing in Bitcoin. 

Advantages 

  • No government authorities or central banks control the Bitcoin network, meaning that users have control of their personal and financial information.  
  • There is a lower risk of identity theft compared to fiat users.  
  • Bitcoin boasts of superior network security as one needs to control 51% of the blockchain to hack the network.  

Disadvantages 

  • The lack of oversight or regulation within the network means that users can easily get away with malicious acts.  
  • Bitcoin price has a reputation of being volatile; therefore, investors can lose their money if they fail to apply proper risk management. 

Conclusion 

There you have it! Bitcoin is arguably one of the wonders of the financial world as it continues to reshape the global financial system. It has also come long way with respect to providing investment opportunities for crypto users. However, it is worth noting the crypto investments come with a considerable level of risk; therefore, we advise you to apply proper risk management while investing in Bitcoin.   

How to buy bitcoin

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Name: Chris Jones

Organization: UrbanLink Media

Phone: 1-855-730-5465

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