Although it may seem like a minor question, the truth is that if you understand how common money works, it will be easier to understand the concept of cryptocurrencies or digital currencies. We will touch all of these points to help you to understand cryptocurrency in this Bitcoin 101.
Money is a representation of value, and different ways of representing that value have been used over time, such as gold, a precious metal. For a long time, gold functioned as money, but later it became uncomfortable to have to carry gold bars, so paper money was invented.
Fiduciary money, whether it is paper money or cash, has two major drawbacks:
- It is centralized; that is, there is an authority to control and issue it, which is represented by the figure of a government or a central bank.
- It has no quantity limits; the authority that controls it is free to print everything it needs. By taking money out of the market in excess, the value of the currency decreases, and the known inflation occurs.
Reasons why, a group of people was in search of currency or medium of commercial exchange that was not subject to these inconveniences and was completely digital.
What Are Cryptocurrencies?
Cryptocurrencies can be defined as limited entries to a database, and they cannot be changed unless certain very specific conditions are met. Just like normal money, cryptocurrencies are digital currencies developed to function as a medium of exchange. Using cryptography, they secure and verify transactions and control the generation of new units.
Why is it called a decentralized system? For a digital money system to exist, you need to have a payment network that keeps records of transactions, balances, and accounts. However, any payment network must avoid a problem called double-spending, that is, nobody, individual or entity, spend that money twice. Banks, which are centralized entities, use a central server that keeps these records. In a decentralized network such as cryptocurrencies, there is no such central server, but that work is carried out by each of the participants in the network. For this reason, each participant has an updated list of the transactions that have been carried out so far, which allows them to verify if the transaction they wish to carry out is possible and prevents duplication of expenses. Therefore, a total and absolute consensus among all the participants is necessary for the system to work.
What Is Blockchain?
Or “blockchain” is the system with which cryptocurrencies work and can be described as an automated database where all the operations carried out in it are saved without being able to be modified because each operation connects to the previous one. Blockchains can be freely shared among many users without risks of any kind. It is called decentralized because it is not controlled by any company, bank, or government. The operation of the blockchain can also be described as an electronic ledger in which all users can freely participate because each transaction is directly related to the user who made it.
What is Bitcoin?
Bitcoin is the first digital cryptocurrency that works in a decentralized way, that is, nobody controls it, no government, company, bank, or financial entity. It does not use a centralized server to record its transactions or its emission because it uses the technology called a blockchain.
Bitcoin History
Attempts to create digital currency have been unsuccessful since the 1980s and 1990s. At the beginning of 2009, using an alias like SatoshiNakamoto, a programmer or group of anonymous programmers, they introduced Bitcoin, which they described as a “peer-to-peer electronic money system.”
Seeing that attempts to build a centralized system had failed, Satoshi decided to develop a decentralized digital cash system, without an authority to control it, and that worked on an equal footing basis allowing file sharing. Thus the first cryptocurrency was born.
How Does The Bitcoin Work?
Each Bitcoin transaction is a file in which the public keys (wallet or wallet addresses) of both the sender and the recipient are recorded, in addition to the amount being transferred. Each user of the Bitcoin network has two keys, a public and a private one, and whoever issues the transaction must validate it with their private key. Once validated, it must be confirmed by network users who are called miners. The miners are the ones who, solving a cryptographic puzzle, mark the transactions as legitimate and transmit them to the network so that each node adds them to its database. Thus, the electronic ledger that is the blockchain is kept updated with each transaction that is made.
What Is Bitcoin Mining? Is It Legal? Is Bitcoin Mining Profitable?
The computers that operate the Bitcoin software and verify that the transactions are valid receive a fraction of Bitcoin for each verified transaction, the miners’ reward. The calculations that must be done to solve the cryptographic puzzles to verify and add each transaction are quite complex. They require a very large computational power that involves high consumption of electricity, so you should calculate your profits accordingly.
How Bitcoin Mining Works?
The system has been designed so that, as more peers install the software to verify operations and extract bitcoins, the more difficult the algorithms become. So the more people try to mine bitcoins, the more difficult the process becomes. There are no specific regulations about it at the moment.
Will Bitcoin Go Up? How Many Bitcoin Are There?
A peculiarity of Bitcoin is that the system has been programmed to generate a fixed number of coins per unit of time and that it halves every four years. This production mode must continue until the maximum established for bitcoin units is reached, which is 21 million, and it is estimated to reach the maximum in the year 2140. According to this stock flow, Bitcoin prices should go more up in the long-run.
What is Bitcoin halving?
“A Bitcoin halving event is when the reward for mining Bitcoin transactions is cut in half. This event also cuts in half Bitcoin’s inflation rate and the rate at which new Bitcoins enter circulation.” according to Investopedia. It is currently set at 12.55 bitcoins every ten minutes, and the next halving is scheduled for this year 2021.
Is The Bitcoin Secure? Can Bitcoin be Traced?
No one can carry out Bitcoin transactions by another person, that is, if you do not have authorization with public and private key information, no one can manage the funds.
To carry out any Bitcoin operation, it is not necessary to provide any personal information, so the identity is secure. Only when it is required to carry out operations to exchange cryptocurrency to fiat money, the agents who mediate in the process request to verify the identity of the people.
As already explained, in the blockchain chain, the information of each transaction is available to everyone, which can be verified. Additionally, the blockchain chain does not allow the same money to be used twice, the operations are irreversible, so it cannot be counterfeited.
The Bitcoin protocol operates under strict encryption, so it cannot be controlled or manipulated by any organization or person.
Bitcoin’s transparency lies in the decentralized nature of its network that does not allow anyone to have full control over it.
What Are Bitcoin Wallets?
Considering that Bitcoin is not physical money, the way of acquiring and storing it is completely different. The service of intermediaries is required that, through the use of keys, public and private, allow to save it and carry out transactions with it. Public keys are the digital addresses that each place assigns to its users, and the private key is the one that each user privately assigns to their account. To perform the operations then, the public key of the recipient is required and, the sender, confirms with the private key the legality of said transaction.
There are several types of Bitcoin wallets or purses that meet certain requirements and vary in aspects of security, accessibility, and convenience. The most used are:
Mobile Wallet
Very suitable for those who use bitcoins daily to pay for products or exchange them. It works through an application on a smartphone that stores private keys and allows direct payments from the phone. They make use of SPV (Simplified Payment Verification) technology that, through trusted nodes in the Bitcoin network, operate with small subsets of the blockchain to ensure that the information is correct. There is a great diversity of them for Android and iOS devices.
Web Wallet
These are companies that have servers for this service and where the private keys of each user are kept. Most of them owned by or related to cryptocurrency exchanges and bookmakers. Servers are available online all the time, and users can access their funds from any device that is connected to the Internet. Availability is immediate and from anywhere in the world where you are.
Is The Bitcoin Regulated?
There is no single global regulation, in each country, there are certain regulations, and they can vary greatly from one country to another. Some countries encourage the trade and use of Bitcoin, while others consider it illegal and exercise prohibitions.
In the United States, the financial entity FinCEN declares that the activity of mining cryptocurrencies and exchanging them for fiat money is classified as a money transfer. Therefore, those who exercise Bitcoins must comply with the regulations and laws regarding this type of activity.
Bitcoin’s decentralization feature makes it suitable as a payment method for illegal activities, which is why in various countries; they are trying to control it. Not being controlled by some central entity causes a legal vacuum on Bitcoin.
In summary, Bitcoin is legal in those places where it is accepted as a means of payment.
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