Bitcoin is a decentralized digital payment system and money. It was invented by a person or group, going by the alias Satoshi Nakamoto, who posted a whitepaper on a discussion board.
Bitcoin functions without a financial system or government authority and doesn't require the cooperation of financial institutions. It may be used as an alternative to fiat currency or as an investment acquired through crypto exchanges. It leverages peer-to-peer transfers on a digital network that records and safeguards all transactions. This network employs a blockchain, an open-source application that chains transaction histories to avoid tampering.
Bitcoin creates money for investors through appreciation, the growth of an asset's market value. There's a lot going on behind the scenes in the Bitcoin network, so here's a lengthy introduction meant to help you enhance your understanding of this digital phenomena.
The Bitcoin Blockchain
The Bitcoin blockchain is a record of transactions safeguarded by encryption and certified by peers—here's how it works. The blockchain is not stored in one location; it is distributed and saved across numerous computers and devices inside the network. These systems are called nodes. Every node has a copy of the blockchain, and every copy is updated anytime there is a verified modification to the blockchain.
The blockchain contains of files (called blocks), which record data regarding transactions, previous blocks, addresses, and the code that performs the transactions and manages the blockchain. So, to comprehend the blockchain, it's vital first to understand blocks.
Blocks
When a block on the blockchain is opened, the blockchain produces the block hash, a 256-bit value that encapsulates the following information:
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The current software version: The Bitcoin client version
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The previous block's hash: The hash of the block preceding the current one
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The coinbase transaction: The first transaction in the block, where the Bitcoin incentive for opening the block was issued
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The block height number: How far away numerically the block is from the first block
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Merkelroot: A 256-bit integer that preserves information regarding the transactions in the block
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Timestamp: The time and date the block was opened
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The target in bits: The network target
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The nonce: A 32-bit number that is appended to the block hash
Queued transactions are added into the block, the block is closed, and the blockchain produces the hash. Each block contains information from the previous blocks, therefore the blockchain cannot be changed since each block is "chained" to the one before. Blocks are verified and suggested via a process called mining.
Bitcoin Mining
Mining is the process of verifying transactions and producing a new block on the blockchain. Mining is accomplished by software applications that operate on computers or equipment created particularly for mining called Application Specific Integrated Circuits.
The hash is the focus of the mining algorithms and devices. A hash is the result of transmitting block data through a hashing algorithm, which generates a fixed-length sequence of numbers and characters regardless matter the quantity of the data passed through it. These hashes are in hexadecimal format, which means they may be translated to a numerical value.
Halving
Halving is an essential idea in Bitcoin mining. At originally, the mining reward was 50 BTC for solving the hash. About every four years, or 210,000 blocks, the award is slashed in half. So, payouts were decreased to 25 BTC in 2012, 12.5 in 2016, and 6.25 in 2020. The last halving happened on April 19, 2024, lowering the award to 3.125. The second halving will come in 2028, further decreasing it to 1.5625.
It's widely said that the last bitcoin will be minted sometime around 2140. However, this is slightly deceptive because the last block reward of 1 BTC or more will be granted somewhere in 2032—right before the incentives are halved to 0.7813 BTC. From that point on, block rewards will be given out in satoshis, as the following table indicates (assuming no modifications to the blockchain's halving schedule are implemented in the future):
There are 100 million satoshi per Bitcoin (eight places after the decimal point), hence in mid-2032 the block reward will shift to 781.3 million satoshi, and will decline every halving until hitting 1 satoshi (0.00000001 BTC). From there, the reward cannot be halved any more, therefore it will stay 1 satoshi until some time when the last satoshi will be awarded, boosting the total number of Bitcoin in circulation to 21 million. Then, there will be no more mining, simply fees paid to the network participants—that used to mine—for validating transactions and proposing new blocks. So, it's more correct to assert that the last halving will occur in 2136, and the last satoshi will be granted shortly later.
Bitcoin Keys and Wallets
A popular inquiry from individuals new to Bitcoin is, "I've purchased a bitcoin, now where is it?" The best way to comprehend this is to think about the Bitcoin blockchain as a communal bank that keeps everyone's funds. You view your balance using Bitcoin wallets, which are like your bank's mobile application.
If you're like many individuals nowadays, you don't spend cash very often and never physically see the money in your bank account. Instead, you use credit and debit cards with security numbers, which operate as tools to access and utilize your money. You access your Bitcoin using a wallet and the keys you're given when you acquire it.
Read Also: Supply Chain Startups Using Blockchain
Keys
A bitcoin, at its essence, is a token representing value. The token is digital (or virtual), and your public key is used to issue it to you. Ownership is transferred when transactions are performed to another person's public key. You utilize your wallet, the smartphone application, to transfer or receive bitcoin.
When bitcoin is allocated to an owner via a transaction on the blockchain, that person acquires their private key. Your wallet contains a public address—called your public key—that is used when someone gives you a bitcoin, similar to the way they input your email address in an email.
Pros and Cons of Investing in Bitcoin
While there are numerous reasons Bitcoin is popular with investors, there are just as many reasons why it shouldn't be. Here's what you should be aware of when contemplating investing in Bitcoin.
Pros Explained
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Bitcoin has undergone exponential growth from its early days, producing massive amounts of wealth for many individuals and businesses.
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Bitcoin's market valuation on Dec. 5, 2024, was more over $1.9 trillion, and its 24-hour trading volume was more than $141.9 billion, which offers plenty of liquidity for the market.
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Many investors use Bitcoin as a hedge against inflation since its market value has exceeded it in the past.
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Bitcoin exchange-traded funds have made trading in Bitcoin easier for regular investors and offer protection from losses if brokers or crypto custodians collapse.
Cons Explained
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While Bitcoin's price has continued to climb since it was released, it sees a great level of volatility, often hundreds of dollars shift in price every day. This is not good for short-term investing methods.
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Bitcoin trading may get pricey. Transaction costs are less than $1, with occasional increases of up to $100 or more.4
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For ESG-conscious investors, mining is a worry since miners are effectively transforming energy into a virtual investment only the affluent can buy.
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While many regard Bitcoin as a hedge against inflation, it only remains this way as long as it outpaces it. Unlike assets designed to buffer inflation, there are no guarantees your money will increase faster than inflation in the future.
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If you acquire bitcoin yourself and keep the keys on an exchange or in your wallet, there is no protection from losses if you lose your Bitcoin keys or they are stolen. The exchange could have insurance if their systems fail to safeguard your keys, but in general, Bitcoin losses due to wallet breaches and stolen keys are not covered.