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If you haven't delved deeply into the world of cryptocurrency yet—the concept of Bitcoin seems confusing.
So in this article, you'll learn the basics of Bitcoin in plain English.
Let's start with the first one.
What is Bitcoin?
Around 2009, Satoshi Nakamoto created Bitcoin.
Bitcoin is a digital currency.
It's much more convenient than carrying heavy loads of physical coins and bills, right?
Now, the difference between Bitcoin and credit card is simple.
Credit cards are centralized.
Bitcoin is decentralized.
How Bitcoin Actually Works
Since Bitcoin is a digital currency, of course, it's stored online.
To be specific, it's stored on a blockchain. Think of a blockchain as a ledger where it records all the transactions and financial activities—but they're all digital.
And those transactions are grouped into blocks that are linked together in a chain.
This chain is stored on other computers that have nodes. [1]
Here are the things that nodes do for each transaction:
- Storing.
- Verifying.
- Relaying.
Nodes are responsible for making the blockchain (or Bitcoin in general) decentralized and secure.
How It's Produced
Bitcoin is only produced by mining.
Basically…
Miners use computers that solve complex mathematical puzzles that validate and secure transactions on the Bitcoin network.
When they solve a puzzle, they add a new block of transactions to the blockchain.
And they’re rewarded with newly created bitcoins.
This process maintains the security and transparency of the network.
However, the more bitcoins mined, the more difficult the puzzles will become—needing more power and energy for the computers.
With this…
It guarantees the creation of new bitcoins at a predictable and controlled rate.
It’s like mimicking the scarcity of gold or coins.
If you want to read more about it in-depth, you can read it here.
Buying and Storing
Bitcoin mining isn't the only way to get some of them.
The easier way to have one is to buy one.
You can buy it on popular crypto exchanges like:
When you own Bitcoin, instead of storing it in a bank—you store it in a digital wallet.
Mainly, there are two types of wallets:
Cold wallet.
- It's connected to the internet.
- Less secure.
- Examples are Trezor and Ledger.
- The best to use if you're long-term investing.
Hot wallet.
- It works offline.
- More secure.
- Examples are Metamask and Phantom.
- The best to use for trading or online transactions.
Each wallet has its own unique address.
It's similar to an account number, where you can send and receive bitcoins.
Why is Bitcoin Valuable
There are a lot of factors that make Bitcoin valuable.
But here are the main ones:
Scarcity
Bitcoin only has 21 million in supply.
And as of now, we have already mined over 19 million.
Similar to the basic economic concept:
If the supply is scarce and the demand is high, the prices go up.
Global Currency
Many people often view Bitcoin as a potential global currency.
Why?
Because it's not tied to any specific country or government.
Unlike fiat and traditional currencies, factors like economic instability can affect them…
Bitcoin's value is determined by its demand and adoption.
This means:
Anyone from anywhere in the world can use Bitcoin for transactions without worrying about exchange rates or international fees.
Innovations
Bitcoin's blockchain is not just about money and exchanges.
It has other uses too.
Like creating smart contracts and decentralized finance (DeFi).
These innovations even make Bitcoin more valuable for investors and tech enthusiasts.
The Risks of Bitcoin
Let's not forget about the risks.
Look…
Bitcoin is volatile. Its price can be unpredictable, like a rollercoaster. One day it might be worth a lot, and the next it could drop a bunch.
This volatility means you could lose a lot of money if you're not careful.
Another risk is losing access to your Bitcoin. If you forget your wallet password or lose your private keys, you can't get your Bitcoin back.
It's like losing your wallet with all your cash inside. There's no way to recover it, so you have to be super careful with how you store and manage your wallet.
Also, Bitcoin has been associated with illegal activities like buying drugs or funding terrorism because it can be used anonymously.
Most Bitcoin transactions are legal and legitimate. But its anonymous nature has attracted some shady characters. This association can lead to regulatory crackdowns or negative biases.
And it will affect Bitcoin's reputation and value.
Remember: Every pro has its con too.
TL;DR
- Bitcoin is a digital currency created around 2009 by Satoshi Nakamoto.
- It is decentralized, unlike credit cards which are centralized.
- Bitcoin transactions are recorded on a blockchain, a digital ledger maintained by computers called nodes.
- New bitcoins are produced through a process called mining, where computers solve complex puzzles to validate transactions.
- You can buy bitcoins on crypto exchanges and store them in digital wallets, either hot (online) or cold (offline) wallets.
- Bitcoin is valuable because of scarcity, potential as a global currency, and innovative applications like smart contracts and DeFi.
- Risks include volatility, losing access to your bitcoins, and association with illegal activities due to anonymity.
With all of these in mind, I hope you've understood the basics of Bitcoin now.
Not all computers have nodes. Nodes are only created if you run a specific software.