What Is Bitcoin?
Bitcoin is a decentralized digital currency created in January 2009. It follows the ideas set out in a white paper by the mysterious and pseudonymous Satoshi Nakamoto.12 The identity of the person or persons who created the technology is still a mystery. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms do, and unlike government-issued currencies, it is operated by a decentralized authority.
Bitcoin is known as a type of cryptocurrency because it uses cryptography to keep it secure. There are no physical bitcoins, only balances kept on a public ledger that everyone has transparent access to (although each record is encrypted). All Bitcoin transactions are verified by a massive amount of computing power via a process known as “mining.” Bitcoin is not issued or backed by any banks or governments, nor is an individual bitcoin valuable as a commodity. Despite it not being legal tender in most parts of the world, Bitcoin is very popular and has triggered the launch of hundreds of other cryptocurrencies, collectively referred to as altcoins. Bitcoin is commonly abbreviated as BTC when traded.
The Bitcoin system is a collection of computers (also referred to as “nodes” or “miners”) that all run Bitcoin’s code and store its blockchain. Figuratively speaking, a blockchain can be thought of as a collection of blocks. In each block is a collection of transactions. Because all of the computers running the blockchain have the same list of blocks and transactions and can transparently see these new blocks as they’re filled with new Bitcoin transactions, no one can cheat the system.
Anyone—whether they run a Bitcoin “node” or not—can see these transactions occurring in real time. To achieve a nefarious act, a bad actor would need to operate 51% of the computing power that makes up Bitcoin. Bitcoin has around 13,768 full nodes, as of mid-November 2021, and this number is growing, making such an attack quite unlikely.
But if an attack were to happen, Bitcoin miners—the people who take part in the Bitcoin network with their computers—would likely split off to a new blockchain, making the effort the bad actor put forth to achieve the attack a waste.
Balances of Bitcoin tokens are kept using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm that creates them. The public key (comparable to a bank account number) serves as the address published to the world and to which others may send Bitcoin.
The private key (comparable to an ATM PIN) is meant to be a guarded secret and only used to authorize Bitcoin transmissions. Bitcoin keys should not be confused with a Bitcoin wallet, which is a physical or digital device that facilitates the trading of Bitcoin and allows users to track ownership of coins. The term “wallet” is a bit misleading because Bitcoin’s decentralized nature means it is never stored “in” a wallet, but rather distributed on a blockchain.
How is Bitcoin Produced?
Producing bitcoin is not that easy, it takes a lot of hard work. It is an electronic currency derived from the mining method, due to which its price increases. Minors solve mathematical and cryptographic problems. To solve this problem, the miner records it as a bitcoin block. The mining process is lengthy. Bitcoins are only created in limited numbers, so the demand for it is increasing because of this.
Uses of Bitcoin
Bitcoin is used in different online transactions. It works on P2P network. Nowadays online developers, NGOs use it for online transactions. Online Payment Just like we do transactions in the bank, we can find out who has paid. But bitcoin is not recorded in the public ledger. It cannot be tracked when an exchange is taking place between two persons. Its record can be seen only twice, once when someone has bought it and the second time when someone is selling it.
Is it Safe to Invest in Bitcoin?
In a 2013 RBI press release, it was said that it is not officially permitted, but there are some risks involved. If you forget your password you will lose your money forever. Sometimes the price of bitcoin falls by 40 to 50 percent in a single day without warning.
Currently the price of 1 bitcoin in India is INR 32.81 Lakh. There is no control over its authority, so its prices keep on increasing and decreasing almost daily according to the market.
Advantages of Bitcoin
Along with knowing what bitcoin is, it is also important to know its benefits, which are as follows:
- You can send bitcoins to anyone and anywhere in the world.
- Its account is not blocked, like sometimes bank accounts are blocked.
- Can be used for international transactions and there are transaction fees.
- In this, the role of the middleman is not there, due to which the transaction is done in less cost.
- It does not have statutory recognition in any country, so it can be used at no extra cost.
Disadvantages of Bitcoin
Along with knowing what bitcoin is, it is also important to know its disadvantages, which are as follows:
- Its biggest disadvantage is that if your data is hacked and cannot be recovered or if you forget the password then you lose all your bitcoins.
- It is not controlled by any authority, due to which it can be used to buy illegal things.
Bitcoin is one of the first digital currencies to use peer-to-peer (P2P) technology to facilitate instant payments. The independent individuals and companies who own the governing computing power and participate in the Bitcoin network—Bitcoin “miners”—are in charge of processing the transactions on the blockchain and are motivated by rewards (the release of new Bitcoin) and transaction fees paid in Bitcoin.
These miners can be thought of as the decentralized authority enforcing the credibility of the Bitcoin network. New bitcoins are released to miners at a fixed but periodically declining rate. There are only 21 million bitcoins that can be mined in total. As of November 2021, there are over 18.875 million Bitcoin in existence and less than 2.125 million Bitcoin left to mine.
In this way, Bitcoin and other cryptocurrencies operate differently from fiat currency; in centralized banking systems, the currency is created at a rate matching the growth of the economy; this system is intended to maintain price stability. A decentralized system, like Bitcoin, sets the release rate ahead of time and according to an algorithm.
Bitcoin mining is the process by which Bitcoin is released into circulation. Generally, mining requires solving computationally difficult puzzles to discover a new block, which is added to the blockchain.
Bitcoin mining adds and verifies transaction records across the network. Miners are rewarded with some Bitcoin; the reward is halved every 210,000 blocks. The block reward was 50 new bitcoins in 2009. On May 11, 2020, the third halving occurred, bringing the reward for each block discovery down to 6.25 bitcoins.
A variety of hardware can be used to mine Bitcoin. However, some yield higher rewards than others. Certain computer chips, called application-specific integrated circuits (ASICs), and more advanced processing units, such as graphic processing units (GPUs), can achieve more rewards. These elaborate mining processors are known as “mining rigs.”
One bitcoin is divisible to eight decimal places (100 millionths of one bitcoin), and this smallest unit is referred to as a Satoshi.6 If necessary, and if the participating miners accept the change, Bitcoin could eventually be made divisible to even more decimal places.