What is Bitcoin? What are Digital Currencies, Cryptocurrency?
Bitcoin, as a cryptocurrency, is a virtual currency or a digital currency. It was created in 2009 by a mysterious person using the alias Satoshi Nakamoto. It is the most prominent and biggest cryptocurrency, with market capitlisation Technically, an individual can buy products and services with a cryptocurrency. However, not many shops accept Bitcoin as a currency yet and some countries have already banned it.
Bitcoin is not controlled by a single authority, but by decentralized network of users, and do not come directly under the whims of central banking authorities or national governments. Today in the market, there are hundreds of active cryptocurrencies.
Like traditional currencies, such as the dollar and pound, Bitcoin also has a value relative to other currencies and physical goods.
To know about Bitcoin and gold relationship, read: Demystifying Bitcoin-Gold Relation: What Investors should expect?
The whole of Bitcoin units can be subdivided into decimals, which reflects smaller units of value. The smallest Bitcoin unit is called a satoshi, or 0.00000001 Bitcoin. Satoshi cannot be broken into ore smaller units. However, Bitcoin’s source code can be further divided beyond this level.
Apart from buying products & services, it can be used to exchange with other private users as consideration for services performed or to pay any outstanding debts. Bitcoin can be swapped for other currencies, on electronic exchanges that function similar to forex exchanges. However, it can also be used to facilitate illicit activity, such as the purchasing illegal drugs on dark web marketplaces like the infamous (and now-shuttered) Silk Road.
Bitcoin can easily be traded for cash or assets digitally like gold or silver with very low fees. This reflects that it has high liquidity, and many see it as an investment instrument looking for short-term profit, as well as for long term gains.
How to buy Bitcoin?
For buying a Bitcoin, an investor has to open a brokerage account with a company that has the license to trade cryptos. Then the investor is required to deposit funds into the brokerage account, after which they can buy bitcoin (BTC). The easiest way to buy or sell digital currency (like bitcoin) is via an online platform (interface) like Coinbase, which is considered one of the most popular cryptocurrency platform in the world presently. Coinbase allows its clients to purchase and sell three of the most popular cryptocurrencies currently trading and are on demand; this includes Bitcoin, Litecoin, and Ethereum.
For information on different cryptocurrencies read: The Advent of Cryptocurrencies- Popular Cryptos in Focus
What is Blockchain? How is it related to Bitcoin?
Blockchain is a public, distributed ledger that is required of all prior Bitcoin transactions for making the transactions secure. Blockchain is essentially the record-keeping technology behind the Bitcoin network. These are stored in groups known as blocks as they are made up of digital pieces of information. Every node of Bitcoin’s software network, which is both the server and terminals, are run by individuals or groups that are popularly known as miners. Miners help in the production of new Bitcoin units that lead to the recording and authentication of Bitcoin transactions, and the making of new blocks periodically. These comprise of an identical record of Bitcoin’s blockchain.
With every new Bitcoin transaction, the Bitcoin blockchain keeps on growing. The Bitcoin blockchain will always be a work in progress, till the time the miners continue their work and keep on recording recent transactions. There is no predetermined length at which the blockchain will stop growing, though there will be finite numbers.
More on blockchain technology: Future Innovation Lies in Blockchain Technology
On average, the miners create a new blockchain every 10 minutes, containing information of all prior transactions and a new transaction block. Every two weeks, Bitcoin’s source code is made for the adjustment of the amount of Bitcoin mining power required for the creation of new blockchains, which is required to provide the average creation interval of 10 minutes. If mining power gets enhanced during these two weeks, then it becomes difficult to form new blockchains for the subsequent two-week span. On the other hand, if mining power declines, it is easier to form new chains. However, for most of Bitcoin’s history, there is a demand for greater mining power.
Each computer in the blockchain network makes its own copy of the blockchain, which reflects that there could be thousands of it, and in the case of Bitcoin, there could be millions of copies of the same blockchain. Each copy of the blockchain is exactly identical, that makes the distribution of that information across a network of computers more difficult to manipulate. In order to manipulate a single block, a hacker requires to change every single block after it on the blockchain, which leads lots of recalculations. Further, it would take a huge and improbable amount of computing power. Overall, the ultimate target of blockchain technology is to allow digital information to be recorded and distributed but does not get edited in order to make bitcoin safe.
Is Bitcoin secure? What are its risks?
Every transaction of cryptocurrency is recorded publicly; therefore, it becomes very difficult to copy Bitcoins, make fake ones or spend the ones that the individual does not have. However, there is a possibility of losing the Bitcoin wallet or forgetting the wallet keys and thus losing them forever. Further, there could be thefts from websites where Bitcoins are stored remotely.
The investment in Bitcoin, has limited legal protection and a high risk of losing some or all of the capital. It is not possible to reverse Bitcoin transaction, it can only be refunded by the person who receives your funds. This means caution has to be exercised while transacting your digital currency. Additionally, currently Bitcoin is an experimental new currency which is actively developing. Each improvement makes Bitcoin investment more appealing but also leads to new challenges. An investor might encounter increased fees, slower confirmations, or even more severe issues.
In addition, recently there have been Bitcoin-specific scams and fraud, Black Market Activity, there is potential to be replaced by other superior cryptocurrency, no proper regulations, there is question on its acceptability by various governments across the world and there is environmental Ills of Bitcoin Mining.
Covid19 has had a positive impact on cryptocurrencies? Read: Cryptocurrency usage booms amid COVID-19 crisis