What is Bitcoin?

Welcome back to Poor Sheep, a blog for people who are in the early stages of their journey to learn about the field of Finance. In the last blog, we discussed what Blockchain is all about. In this article, we will move on to talk about Cryptocurrencies (most of which work on blockchain technology) with a special focus on Bitcoin.

If you’re unacquainted with the technology of blockchain, you can check out my previous blog — What’s all the hype around Blockchain?

Photo by Brian Wangenheim on Unsplash

What are Cryptocurrencies?

According to Investopedia, “A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.”

The first cryptocurrency ever created was Bitcoin. It was introduced to the world in 2009 by an individual or group under the pseudonym of “Satoshi Nakamoto.” The true identity of this individual, or group, is still unknown, but a few people do match the profile.

About 4,000 cryptocurrencies are currently in existence apart from Bitcoin, which are also known as Altcoins. Some of the most popular Altcoins, based on market cap, are Ethereum, Tether, Binance Coin, Cardano, and Dogecoin. Despite the vast variety of Altcoins available, Bitcoin enjoys a market cap dominance of over 45% in the Crypto market.

Bitcoin

Bitcoin, to put it simply, is virtual money that can be used for making online transactions. It was created after the Great Recession of 2008 with the idea of disintermediating financial transactions, such that banks would not need to be involved for every single one. It works on the principles of blockchain and is thus “decentralized,” meaning there is no central authority that regulates this Cryptocurrency. Instead, it operates on a peer-to-peer system, and transactions are verified by a mechanism called proof of work.

In order to obtain Bitcoin, it can either be mined using your computer as a node or purchased from an app like Gemini or CoinBase.

Mining

Mining is the process of solving cryptographic problems to generate new blocks. The problems are entirely computational, and you will need to invest a substantial amount in upgrading your set-up in order to mine Bitcoin profitably. One block is generated every 10 minutes, and it contains data of about 2,700 transactions. If a miner solves a block, they are rewarded with 6.25 Bitcoins. However, this amount is halved every 210,000 blocks, which takes roughly 4 years. There are currently a little over 18 million Bitcoins in existence out of a total of 21 million, and the rest are projected to be discovered by 2150.

<a href=”https://www.freepik.com/free-photos-vectors/isometric“>Isometric vector created by sentavio — www.freepik.com</a>

Miners don’t just earn from the reward but also from transaction fees which work as an incentive to record a particular transaction in the block. This incentive is essential since only a limited amount of transactions can be included per block (2,700 currently).

When we are talking about Bitcoin mining, we also need to address the downsides. First, it requires a considerable financial investment in buying the technology required. Second, buying this technology does not guarantee a return on investment since mining also involves an element of “luck.” Third, it utilizes an exorbitant amount of energy which has caused uproar amongst environmentalists. To address these energy issues, a mechanism called Proof of Stake is being worked upon, which is a greener alternative to Proof of Work. ASIC mining is also increasing in usage, which is comparatively more energy efficient than normal mining.

Other ways to obtain Bitcoin

If you don’t want to take on the risks which come with mining, using apps like Coinbase and Coinswitch would be recommended. These apps allow you to exchange Bitcoin by broadcasting your transactions from their network onto the blockchain. It is advisable to use apps which store ‘private keys’ in cold storage as it helps safeguard against web hacks. You can also send Bitcoin purchases through these apps to companies such as Blockfi, which pay you interest on the amount deposited. Using apps to purchase Crypto, however, comes with its own set of cons. Hackers have been able to enter the networks of these apps in the past and steal Bitcoins from other wallets.

Initial Coin Offerings

An Initial Coin Offering, as you might have noticed, sounds similar to an Initial Public Offering. Unsurprisingly, both of them serve identical purposes — helping a company raise funds. Funds raised through an ICO are generally used to create new coins or build a new app/service.

Investors interested in the offering buy into it and receive a token of the cryptocurrency in exchange. This token could either represent a stake in the company/project or have some utility in using the product/service the company will be launching.

With that, we come to the end of this blog. I hope you now have a better understanding of what Bitcoin is and how it works. To understand the technology of Blockchain better, you can check out my previous blog. Thank you for reading, and stay tuned for more of Poor Sheep.

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What is Bitcoin? was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

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