There has been a lot of buzz around Bitcoin recently as more and more people are looking into it as a way to invest. But how exactly does it work?
When you buy Bitcoin (often referred to as BTC), it is equivalent to buying a password to gain access to a single, unique coin. Every Bitcoin in existence is secured by a combination of public and private keys. The public key acts as your mailing address of sorts, and people can use this to make transactions with you. The private key is the password you use to be able to access a unique Bitcoin. Only you will be able to see and access your private keys, just like a locked mailbox. So long as people know your address, they can send you messages, but you are the only one who can open those letters.
Your private key also acts as your personal digital signature. When you send Bitcoin to someone, you are basically writing up an online contract that you sign off using your personal private key to verify the source of the currency and that you are indeed sending it out.
With regards to how Bitcoins are mined, there are Bitcoin miners on the network who use mining nodes, which are specialized computers that run open-source software. The software can be used by anyone who has the right computer specifications, but as more Bitcoin is mined, the mining process becomes more competitive, and the computers would need faster processors to keep up.
Miners are also vital to clearing and reconciling Bitcoin transactions that happen all over the world. They do this by compiling any new transactions into “blocks” which can be compared to the pages in an accounting ledger. Each block made will also contain the information from the block before it, linking them together like a chain. In order to make a block, a miner needs to complete an algorithmic puzzle. Once a problem has been solved, other mining computers can check to see if the successful miner has the right solution. The complexity of the puzzles prevents blocks from being made easier and ensures that there can only be one true blockchain.
When a miner solves a math puzzle from the mining software, there are protocols in place that let the person doing the mining get a look at the predetermined number of new Bitcoins on the ledger. The Bitcoin network is designed so that new blocks are completed approximately every 10 minutes. And in the case that problems get solved faster, the network automatically makes every subsequent problem much more complicated than the last and vice-versa.
The Bitcoin network is also designed to halve the number of coins that miners receive overtime. In a process called Bitcoin Halving, once the system has generated a total of 210,000 blocks, the amount of Bitcoin rewarded to miners gets cut by half. Since there can only be 21 million Bitcoins in circulation, it’s predicted that the network will reach that mark by the year 2140.
But what exactly can you buy using Bitcoin?
Some experts would say that Bitcoin’s inherent volatility would not make it a reliable medium of exchange, but that definitely has not deterred people from using it as currency.
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One thing to note is that BItcoin transactions are irreversible. You have no way of revoking your Bitcoins back if you ever decide to transfer your funds to someone else. This mechanism is particularly useful for retailers since they won’t ever have to worry about things like credit card chargebacks. However, this is a problem for the senders who have no way of getting their Bitcoin back if they ever get scammed.
Making transactions using Bitcoin also comes with a fee. There is prioritization for those who include a tip with every transaction they make, and the higher your tip, the more prioritized your transaction will be.
Even the transaction fees aren’t safe from the volatility that Bitcoin is known for. Back in 2017, it averaged at about 0.3 Bitcoins, but in 2018 it rose up to 40 Bitcoins. Once Bitcoin nears its limit of 21 million, miners will stop being rewarded for their work, and this might make transaction fees even higher.