The world’s first cryptocurrency was introduced in 2009, during the aftermath of the 2008 Financial Crisis. It was introduced to effectively replace third party financial institutions in online transactions.
WHAT IS BITCOIN?
Bitcoin is a peer-to-peer electronic cash system launched by an anonymous developer or group of developers under the alias Satoshi Nakamoto.
Bitcoin proposed the need for an electronic payment system based on cryptographic proof instead of a trust based mechanism used by third party financial networks. This allows any two parties to make direct transactions with each other without the need for a trusted third party.
According to Satoshi, there are several issues with trust based financial systems;
1. Increased transaction costs
2. Cutting off the possibility of small casual transactions by limiting minimum transaction size
3. requiring customers to provide more information than necessary
4. Certain percentage of fraud is accepted
These issues can be avoided by using physical currency, but this isn’t possible for online payments. Bitcoin with its cryptographic P2P network, offers to solve this problem.
HOW DOES IT WORK?
Bitcoin is built on a distributed digital ledger system called a Blockchain. It uses a shared database to store information in a digital format.
The network collects information in groups known as Blocks, which holds sets of information. Each block has a certain storage capacity which when filled are closed and linked to the previous filled block, forming a chain of data known as Blockchain.
When a transaction is made on the Bitcoin blockchain, the data from the previous block is copied to the new block with new information. The transaction must be verified by validators of the Bitcoin network called Miners before adding to a block. When the new information is verified, a new block is opened and a Bitcoin is created. The Bitcoin is given to the miner who verified the data within the block.
Data stored on the blockchain cannot be edited, this is what makes Bitcoin trustworthy and secure. Bitcoin uses a SHA-256 hashing algorithm to encrypt data stored on the blockchain. The algorithm encrypts transaction data into a 256-bit hexadecimal number, which contains all the transaction data and information linked to the previous blocks.
Bitcoin transactions are placed on queue for miners to validate. Miners attempt to verify the same transactions simultaneously by trying to solve a four-byte number included in the particular block’s header. The block header is repeatedly hashed or regenerated by the miners until the cryptographic problem is solved. Once solved, a new block is created for the next transaction to be encrypted and verified.
Only 21 million Bitcoins will ever be issued and a new Bitcoin is added to the network every 10 minutes. The last ever BTC is expected to be mined in the year 2140. According to the framework, the total number of Bitcoins is not expected to reach 21 million. This is due to the network’s use of halving methods known as bit-shift operators. These arithmetic operators round decimal points down to the closest smallest integer.
This rounding occurs when the block reward for creating a new block is divided in half and the amount of the new reward is calculated. The number of bitcoins issued per block decreases by half approximately every four years. When Bitcoin was first released, the number of BTC issued per block created was 50, and since then the number has decreased to 6.25 BTC per block created in 2020.
As of January 2022, 18.9 million Bitcoins have been issued with about 2.1 million bitcoins left to mine.
WHAT ARE IT’S USES?
Bitcoin was launched as a payment system. It can be used to purchase goods and services from anywhere. Today many stores, companies, websites and even countries accept Bitcoin payments. Users can connect their bank card to a crypto wallet in order to make payments in Bitcoin.
Due to its limited supply, the cryptocurrency is also used by investors as an alternative investment tool to stocks and bonds, and as a store of value like gold and real estate.
HOW TO BUY BITCOIN?
Apart from mining, Bitcoin can be bought from cryptocurrency exchanges. Due to its high price, it is difficult for most people to purchase an entire Bitcoin, but portions of BTC can be bought using fiat currency over the exchanges.
Users can create an account on the exchanges funded by their bank account. Bitcoin bought through exchanges can then be transferred to crypto-wallets to be stored and used for payments.
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