Bitcoins Basics: How Does Bitcoin Work?


May 30, 2018

Bitcoin is the “gold” that the enthusiasts are digging through their smartphones, computers and special gadgets called mining rigs. It is the future of financial transactions and modern banking, as the idea of cryptocurrencies has already managed to revolutionize our perceptions about what money is, how it is created, supplied and valued. Bitcoin has already managed to become one of the most expensive assets that exist in the financial markets. But what is it and how it works?

How Transactions Work

Imagine that you have some coins in your wallet and that you have to pay for some goods or services. You’re initiating a transaction that will be included in the public ledger and enter the number of coins to send. Your transaction goes through the scrutiny of all the network members and they check the validity and confirm it. To maintain the integrity of blockchain the record of your transactions needs to be stored in a block to retain the history of your account balance. Those blocks are protected by mathematical passwords that should be solved to seal transactions in the block where the upcoming transactions can be recorded. Those passwords are solved by the network members, and the network gives extra rewards to those who manage to solve the blocks. This is how the new crypto coins are released and supplied. That is why the members of the network are called miners since they are working hard using specialised computers to de-puzzle new blocks and find digital coins. The networks keep the security of the blocks and control the supply of the coins in this way. It is also important to note, that the price of bitcoin is rapidly growing because more and more miners are entering the market so the system automatically adds more difficulty to the blocks to retain the balance of the supply.

The value of Bitcoin

Bitcoin remains to be the most popular and secure crypto coin these days, with value of the coin remaining stable despite certain fluctuations. The market cap of the currency is higher than the indices of all the other currencies combined reaching $10 billion dollars.

Thanks to new applications of cryptocurrencies in the financial industry and improving public image this cryptocurrency have highly increased its demand, which is causing significant fluctuations in its price. When we account for such factors as the high hash rate, the electricity consumption (215 KWh per one transaction) and the average block time (8.09 minutes), it becomes apparent that BTC is also the most resource-consuming cryptocurrency to mine, especially for those who have lower investment capacities.

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Investing in Bitcoin

The price of Bitcoin is growing also because of its limited supply, as there are only 21 million bitcoins available. The system automatically responds by creating more difficulty when adding more network hash rates to the blockchain. Therefore the miners need to double their computational power to follow up the system. This increases the price of bitcoin because more efforts and energy is being consumed by it.

The increase in the price does not mean that you missed your chance, as cryptocurrencies have limited supply unlike the fiat money, which means that the sooner you set a stake, the better. However, please make sure that you comply with all of the technicalities of different crypto coins before making an investment decision.

However, if you are targeting bigger investment volumes with a minimum of $10,000 to ensure reasonable mining profitability for acquiring your own stake in the “currency of the future”, this coin remains the right option. Bitcoin is an expensive cryptocurrency that has been properly researched and understood. That is one of the reasons that stimulates the rapid increase in its price and demand.

Bitcoin or Fiat Currencies?

There are two main options for using bitcoins instead of fiat money. First, you can directly exchange them into fiat money the way you convert one national currency to another and then withdraw the money to your bank account. There are special cryptocurrency exchanges that offer such services. We suggest relying on the most trusted exchanges (e.g. Coinbase, Bitstamp, EtherDelta), since the number of scam service providers is growing.

You can also use cryptocurrencies to pay for goods and services directly to the merchant. The number of stores both online and offline accepting bitcoin payments is growing worldwide, for example, there will be over 200 thousand points of sale accepting bitcoins in Japan in 2018 where cryptocurrencies are legal. This means that Bitcoin is becoming a common method of payments and there is a chance that it will substitute the payments we are using at the moment.