Many are saying that the digital revolution is underway, with Bitcoin (BTC) leading the charge. It’s difficult to go even a few hours without hearing mention of Bitcoin, given how much popularity the crypto has achieved around the world. But there is a big difference between hearing about Bitcoin and understanding what it actually is, how it works, and how you can profit from it.
The truth is that cryptos aren’t magic, they aren’t operating outside of commonly understood economics, and aren’t thumbing their noses at modern society. Cryptos, Bitcoin included, are simply a currency based on a decentralised system. But it’s important to understand that decentralised currency isn’t an unusual idea. The concept of a decentralised currency has been around for a long time, this just happens to be the first time we’ve had the tech needed to make a decentralised currency possible in a mainstream marketplace.
Let’s get a better understanding of what Bitcoin is, what blockchain is, and if cryptos are a smart investment.
In 2008, the global economic recession hit, shaking the world’s financial infrastructure to its core. The recession exposed a certain level of insecurity within centralised financial systems, indicating that they had weaknesses previously unseen. Out of this concern, Bitcoin was born a year later in 2009. Or at least that’s what the origin story of BTC is according to a few sources. What actually went on during the early days of Bitcoin is largely unknown, given that much of the earliest work was done by a mysterious, shadowy figure operating under the pseudonym of Satoshi Nakamoto.
What made Bitcoin stand apart in 2009 is that it was based around a decentralised system. Transactions could simply be sent electronically between peers, carrying their value with them. This is known as a peer to peer system, and it’s how Bitcoin was originally intended to be used. Peer to peer means that there is no need for a centralised authority like a bank, all but entirely eliminating the costs of traditional banking. If there are no banks, there is also no risk of banks collapsing either – something that’s a very real concern globally. Essentially, Bitcoin is an easy, straightforward solution that speaks for itself.
Bitcoin today doesn’t actually work based on a peer-to-peer network, instead using blockchain. But the same basic principle of a system without a central authority has been retained.
Importantly, Bitcoin inherited its infrastructure from an already existing network of so-called miners. Miners are third parties that verify transactions independently, ensuring that there is no risk of fraud. As miners experimented with Bitcoin, they created a broad, unbiased system of verification, allowing anyone with a computer to participate. The mining network today is referred to as a blockchain, though the technology has advanced dramatically since its original inception.
As far as who actually invented Bitcoin is concerned, there is no straight answer. The Bitcoin community has always rumbled with talks of Satoshi Nakamoto; a mysterious figure that orchestrated the early days of the crypto market. There is no confirmation if Nakamoto is real, has ever actually really been involved in Bitcoin, or is in any way relevant to the invention of Bitcoin. The truth is that Bitcoin was likely created by a group of programmers, none of whom wanted to deal with the inconvenience of suffocating media attention. This doesn’t matter either way, since Bitcoin isn’t currently based around a single person or group of people. Who originally invented Bitcoin is irrelevant, more so even than who Nakamoto actually is.
Bitcoin and other cryptos work because of another big technological advancement; blockchain. Blockchain itself is almost as important a concept as cryptocurrencies, acting as the backbone of digital transaction systems. Without blockchain, there can’t be cryptos, it’s as easy as that.
Bitcoin is based around a network, as would be expected. The network has a list of transactions, going back as far as the very first transaction, much like a ledger. If someone makes a transaction the ledger is updated, and the applicable amount of Bitcoin is transferred from address to address. It all operates just like a traditional bank, but with a single, enormous difference. When a transaction is made on a blockchain the information isn’t sent to a central authority like a bank for processing. Instead, the transaction is sent through a decentralised network made up of hundreds of thousands of third party computers. There is no centralised authority at all, creating a financial system that can never be controlled by a single person. But if that’s the case, how can it be certain that no fraud is occurring? This is where blockchain comes in.
Any global computer network needs a physical infrastructure, and in the case of Bitcoin, that infrastructure is provided by miners. Miners are independent, unbiased entities that simply provide computer processing power. When a transaction is made the information is divided up into vast, encrypted information blocks. The blocks are processed by miners and verified, thereby allowing the Bitcoin financial system to operate. For their contribution, miners receive small payments in the form of BTC.
Importantly, miners have no control over the information blocks that they process. When a block is updated, including any new transactions, the ledger update is checked against the next block. If the blocks don’t match according to the existing ledgers, the new block will simply be refused. This is the security system that keeps blockchains almost completely impenetrable.
To put it another way, although hacking has occurred in the crypto-sphere it has never been the blockchain itself that was compromised. Blockchain technology is, to date, still considered to be uncrackable. Certain crypto exchanges, on the other hand, have shown signs of weakness.
Bitcoin and mining are inseparable, given that without mining, the blockchain couldn’t exist. Miners must be willing to step up, volunteer their hardware, and process blocks. But is it actually worth it for miners, and do they really earn enough BTC to make the effort worthwhile?
The short answer is that, yes, of course, mining is worthwhile, otherwise miners wouldn’t bother. But it is also important to understand that there are different systems by which blockchains can function. The Bitcoin blockchain operates on a proof-of-work system.
Proof-of-work means that computers involved in the blockchain must solve mathematical equations to verify a processed block. The processing of the ledger itself isn’t particularly taxing for a modern computer, but the solving of the mathematical equations is. When a computer has solved the equation the block is considered finished, and the information is forwarded. The computer that finishes solving the mathematical equation first will earn the BTC reward.
Proof-of-work systems have been criticised, given that intensive computer processing is required. An enormous amount of electricity is therefore being tapped for blockchains, with many computers required to constantly be running at near maximum capacity. There are other systems, such as proof-of-stake, which require just a fraction of the electricity consumption.
The competing Ethereum blockchain switched to a proof-of-stake system, prompting Bitcoin to do the same. However, there has not yet been any talk of Bitcoin making the same switch.
The problem with mining is that it creates a very real economic problem. Namely that, if there is a constant new supply of BTC being released to miners, the market will eventually become flooded with currency. The solution to the flooding problem is a system referred to as halving. Halving means that after every four years or 210,000 blocks mined - whichever comes first, the amount of BTC paid for mining is halved.
This might seem like mining gets gradually less and less profitable over time, but theoretically, a reduction in value shouldn’t be the case. If the supply of Bitcoin is halved it should by extension also increase the value of the remaining Bitcoin that is being mined. So, although less BTC is being mined, BTC itself should have doubled in value.
Either way, halving has served its purpose up until now. There is no shortage of miners and the Bitcoin blockchain has remained extremely robust.
The question of what purpose Bitcoin serves is a complicated one. The original idea of Bitcoin was to replace traditional banking systems, removing the need for banks and other central authorities. Bitcoin does still serve this purpose to an extent, but has gradually evolved into being an investment strategy more than anything else.
Since the majority of day-to-day traders worldwide don’t actually accept Bitcoin directly, it is still necessary to exchange the crypto into fiat currency before spending. So, as a day-to-day currency Bitcoin still isn’t particularly convenient. With that said, BTC is enormously valuable and is often referred to as digital gold.
Most traders today consider Bitcoin to be an investment opportunity. BTC is bought and held, based on the idea that inflation will yield future payouts. To put it another way; most traders now think of Bitcoin as a long-term investment and not actually a currency.
The digital Bitcoin currency was originally established as a way for peer to peer transactions to be made, eliminating the need for central banks. Peer to peer transactions were replaced by blockchain systems as the concept of cryptocurrencies evolved, giving us the market we have today. As it stands, Bitcoin and the Bitcoin blockchain are a vast world spanning network relying on roughly a million miners.
In terms of value, Bitcoin has become extremely sought after, with many traders sinking a great deal of money into the BTC market. Most traders don’t transact with BTC on a day-to-day basis, given that the crypto is still not widely accepted. However, traders do still buy Bitcoin as a long-term investment. The value of Bitcoin does fluctuate dramatically from day to day but the general consensus is that BTC has a strong future.
As far as other crypto options are concerned, there are a handful of major coins, including Ethereum and Tether. New coins are introduced on a regular basis, though few of these so-called altcoins ever come close to being a smart investment. Bitcoin, most traders agree, is the safest, most reliable place for traders to invest.
Bitcoin and other cryptocurrencies aren’t actually encrypted. The name cryptocurrency comes from the technology that makes the coins possible, namely the blockchain. The blocks of information sent to miners are encrypted, with specialised software required to read and process the information. So, it is the blockchain technology that cryptocurrencies are named after.
Bitcoin was originally established as a way for financial transactions to be made without the need for a centralised bank. Bitcoin does still technically serve that purpose, but is now more commonly seen as a long-term investment opportunity. Bitcoin that is bought today may have a much higher value in the future, thereby giving the buyer profits.
Bitcoin can still be used to make financial transactions, including the buying of goods and paying for services. However, most traders today don’t use BTC in this way.
It is possible to make money with Bitcoin in a number of ways, but the primary means for earning BTC are mining and investment. The Bitcoin blockchain requires multiple miners, all of which are rewarded for their work with BTC. Miners allow their computer hardware to be used for the processing of transaction information, otherwise known as blocks. When a block is processed a payout of BTC may be made to the miner. Miners generally earn a decent amount of BTC per month, depending on the hardware in use.
Investment involves buying BTC for fiat currency, and then selling that BTC later for profit. If Bitcoin gains value over time, the original investment will have a higher value.
It is therefore possible to earn money in Bitcoin market, assuming that an upfront amount is invested. In the case of mining powerful computer hardware is required. In the case of investment, some fiat currency must be initially invested.