What is Bitcoin and How Does it Work?

 

What is Bitcoin and How Does it Work?

Estimated Reading Time: approximately 6 to 8 minutes.

 

Bitcoin is a digital currency / cryptocurrency that operates on a decentralized, peer-to-peer network, enabling transactions without the need for intermediaries such as banks or payment processors. It relies on decentralized blockchain technology, a public ledger that records all transactions transparently and securely. It was invented in 2008 by an unknown person or group of people using the pseudonym Satoshi Nakamoto and was released as open-source software in 2009.

Key Features:

• Decentralization: Bitcoin is not controlled by any government or institution. It is maintained by a global network of computers (nodes).
• Limited Supply: Only 21 million bitcoins will ever exist, making it scarce and resistant to inflation.
• Anonymity: While transactions are publicly visible, the identities of users are pseudonymous.
• Security: It relies on a peer-to-peer network of computers to validate and record the transactions. These transactions are secured by cryptographic techniques, ensuring they cannot be altered once verified.

How It Works:

1. Crypto Exchanges: Bitcoin on crypto exchanges is bought, sold, or traded using fiat or other cryptocurrencies. Transactions occur through user orders, matched by the exchange, and can be stored in hot or cold wallets securely.
2. Wallets: For storage of Bitcoin, investors can use a digital wallet to store their Bitcoin. Wallets can be software-based (Hot - online or mobile apps) or (Cold - off-line) hardware devices. Popular options include Coinbase Wallet, Uphold Wallet, MetaMask Wallet, Tangem Wallet, Ledger, or Trezor.
3. Blockchain: When a transaction occurs, it is broadcast to the network, verified by miners that use cryptographic techniques (computational solution of mathematical problems) to verify and add transactions. These transactions are grouped into blocks, which are then linked together in a chain, hence the name "blockchain."
4. Scarcity: This is a key feature of Bitcoin. There is a limited supply of bitcoins, with only 21 million bitcoins ever to be created. This scarcity is built into the system through a process called mining.
5. Mining: Miners compete to solve complex mathematical puzzles to validate transactions. In return, they receive new Bitcoin as a reward, which is how new Bitcoin enters circulation.

How to Use Bitcoin

Bitcoin has multiple use cases:

1. Purchases: Some online stores and some brick-and-mortar stores accept Bitcoin as payment. As time progresses, the adoption of accepting Bitcoin and other cryptocurrencies is becoming more prevalent.
2. Investment: Bitcoin is often bought and held as a store of value or traded for profit.
3. International Transfers: Bitcoin allows for fast, low-cost cross-border payments compared to traditional systems.
4. Donations and Crowdfunding: Nonprofits and crowdfunding platforms often accept Bitcoin.

Steps to Get Started:

1. Sign up on a Crypto Exchange: Popular exchanges like Coinbase, Binance, or Kraken are available in the US.
2. Secure Your ‘Log In’ Process: Use two-factor authentication (2FA) and save your ‘log in’ credentials in a secure place.
3. Buy Bitcoin: Purchase Bitcoin from the cryptocurrency exchange of your choice. Simply transfer fiat currency from your bank (e.g., USD or EUR) to buy it.
4. Make Transactions: To send Bitcoin, enter the recipient’s wallet address and confirm the amount. Transactions can take a few minutes up to 30 minutes to complete, depending on network congestion.

Can You Turn Bitcoin into Cash?

Yes, Bitcoin can be converted into cash through several methods:

1. Cryptocurrency Exchanges: Platforms like Binance, Coinbase, and Kraken allow you to sell Bitcoin for fiat currency, which can then be transferred to your bank account.
2. Bitcoin ATMs: These physical machines allow users to sell Bitcoin for cash.
3. Peer-to-Peer (P2P) Trading: You can sell Bitcoin directly to other people through P2P platforms like LocalCoinSwap or NoOnes. Others are available, but not in the USA just yet.
4. Debit Cards: Some platforms offer Bitcoin or cryptocurrency debit cards that let you spend Bitcoin or crypto directly or withdraw cash from ATMs.

Note: Converting Bitcoin or crypto into cash may incur transaction fees and tax implications depending on your country.

How Do You Make Money With Bitcoin?

There are several ways to profit from Bitcoin:

1. Trading:
• Day Trading: Buying and selling within short periods to profit from price fluctuations.
• Swing Trading: Holding Bitcoin for days or weeks to benefit from medium-term price trends.
2. Long-Term Holding (HODLing):
• Purchase Bitcoin and hold it for months or years, expecting its value to increase over time.
3. Mining:
• Participate in the mining process by contributing computational power to validate transactions. Successful miners earn Bitcoin rewards, though this requires significant investment in hardware and electricity.
4. Earning Interest Through Lending:
• US regulations limit Bitcoin lending on centralized exchanges. When lending Bitcoin through DeFi (decentralized finance) lending platforms, you’ll need to lend WBTC (wrapped Bitcoin), a tokenized version of Bitcoin.
5. Staking (for similar cryptocurrencies):
• Although Bitcoin itself cannot be staked, other cryptocurrencies offer staking opportunities to earn passive income. Update 11/27/24: See updated info below courtesy of CoinGecko.
6. Earning Bitcoin:
• Some platforms and apps pay users in Bitcoin for completing tasks, surveys, or offering freelance services.

Where Can You See the Current Price of Bitcoin?

The current price of Bitcoin is readily available on:

• Cryptocurrency Exchanges: Platforms like Binance, Coinbase, and Kraken display live prices.
• Market Tracking Websites: CoinMarketCap, CoinGecko, and CryptoCompare provide detailed price charts, historical data, and market analysis.
• Financial News Sites: Bloomberg, Yahoo Finance, and CNBC also track Bitcoin prices.
• Apps: Mobile apps like CryptoMarketStats, CoinGecko, Crypto Bubbles, and CoinStats let you track Bitcoin prices on the go.

Prices can vary slightly between platforms due to market conditions, so it’s good to check multiple sources.

Is Bitcoin a Good or Bad Investment?  Pros vs. Cons

Short-Term Investment:

Bitcoin is highly volatile. Prices can swing dramatically within hours due to market sentiment, news, and macroeconomic factors. Short-term trading (day trading) can be profitable but requires deep market knowledge, technical analysis skills, and risk tolerance.

Long-Term Investment:

Many investors see Bitcoin as a “digital gold” and a hedge against inflation due to its limited supply. Its adoption and increasing institutional interest suggest potential long-term growth. However, its future is uncertain, and regulation or technological developments could impact its value.

Pros and Cons of Investing:

• Pros:
• High potential for returns.
• Decentralized and resistant to censorship.
• Growing adoption in mainstream finance.
• Cons:
• Price volatility.
• Regulatory risks in certain countries.
• Requires technical knowledge for secure storage.

Short Term vs. Long Term:

• Short Term: High risk and high reward; suitable for experienced traders.
• Long Term: Potentially lower risk if you believe in the technology and its adoption over time, but still carries uncertainty.

In Summary:

Bitcoin is a decentralized cryptocurrency powered by blockchain technology, ensuring secure, transparent transactions without intermediaries. It facilitates peer-to-peer trading and can be converted to fiat currency via cryptocurrency ATMs or exchanges. Bitcoin serves as a digital payment method and an investment, thus making it appealing for its potential long-term value. While short-term price volatility can pose risks, its underlying technology offers innovation and financial inclusion opportunities. Platforms supporting buying, selling, and/or trading ensure flexibility with both fiat and crypto payment options, enhancing its usability globally.

Update 11/27/24: 

The following information is Courtesy of CoinGecko. Full video here: Can Bitcoin Earn You YIELD?? Babylon Bitcoin Staking Explained!! 

Bitcoin flows to Sui 

Bitcoin staking protocols Babylon and Lombard are looking to introduce liquid-staked BTC to the Sui ecosystem.

As per their recent announcement, users on the Sui Layer-1 will be able to stake their Bitcoin on the Bayblon Layer-2 to mint Lombard’s liquid-staked LBTC token, starting from December onwards.

This allows BTC holders on Sui to do more with their holdings across various existing dApps on the network by utilizing LBTC as collateral.

Blockchain development firm Cubist will be in charge of handling the infrastructure for minting and staking BTC on Sui.

Lending protocols on Sui, such as NAVI, have already planned to integrate LBTC into their list of supported assets.

However, it’s worth noting that although users are staking their BTC on Lombard, the protocol has yet to distribute any staking yield to LBTC holders.

 

Disclaimer