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What is Bitcoin and how does it work?

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Alright, so what is Bitcoin and how does it work? Let’s start with a definition and then break it down to understand what it exactly means:

Bitcoin (₿) is a digital currency also called cryptocurrency as it uses cryptography for its security. It uses a network of computers to facilitate instant global transactions that are all recorded in a decentralized public ledger (the Blockchain).

WHAT IS BITCOIN?

Bitcoin is a digital currency because it does not exist in physical form. It’s just a script, or code, that allows for transfer of “virtual coins”. It was created around 2009, by an anonymous group (or maybe, individual) that calls itself Satoshi Nakamoto. He, she or they have set in the core code there will ever be a total of 21,000,000 Bitcoin in circulation.

The initial price of Bitcoin at launch was below $1 and at the time of this article it is now close to $60,000. The price of Bitcoin is simply set by offer and demand. Meaning, how much are buyers willing to pay for it.

HOW DOES IT WORK?

It uses complicated cryptography to secure the transfers and is therefore often referred to as the first cryptocurrency, although there have been other attempts at creating cryptocurrencies prior to Bitcoin.

To process those transactions, the Bitcoin network uses thousands of participating computers (or servers) scattered all over the world (which is why we talk about decentralization) and often referred to as ‘nodes’. Those computers or nodes are handled by people like you and me and are called ‘miners’ which is another term you will often hear when talking about Bitcoin, but more on that later.

Every time a transaction is processed (or mined) a new record (or block) is added to the Bitcoin public ledger. Entries are strung together in chronological order, creating a digital chain of blocks. All those blocks of transaction data form the Blockchain. Another more simplistic way of understanding the Bitcoin ledger and the blockchain, is to view it as a public online excel list that stores all the transaction data and is replicated in many computers all around the world, to remain accessible at all times.

WHAT IS MINING AND WHAT ARE MINERS?

Bitcoin mining is the process of adding new transaction data (blocks) to the Bitcoin ledger or blockchain. The people who do that by allocating computational power to the Bitcoin network are called ‘miners’. When a miner adds a new block to the Bitcoin blockchain, it essentially solves an elaborate mathematical puzzle and is then rewarded with a fee paid with new Bitcoins and fees from the transaction requestor.

The more blocks that are added to the ledger, the more complex the mathematical puzzle the miners must solve becomes, thus requiring more and more power. This explains the “power consumption polemic” around bitcoin. Today roughly 18,000,000 (out of the max volume of 21,000,000) Bitcoin, have been created by the mining process. But because it has become more and more complicated to mine Bitcoin, it is estimated that the last Bitcoin will be created in 2140. After that point, the miner will only be rewarded in fees and no longer with new Bitcoins.

HOW TO BUY BITCOIN?

The easiest way to buy Bitcoin is via exchange like Coinbase or Binance. They allow you to buy, sell and hold your Bitcoin and many other cryptocurrencies. It’s important that those exchanges allow you to buy “real” cryptocurrencies that can then be sent or stored in your digital wallet. This is to be differentiated from cryptocurrency trackers, sold on exchanges like eToro and Robinhood that cannot be moved!

If you would like to be coached on how to buy your first Bitcoin or Cryptocurrency, feel free to reach out to us. We’ll walk you through all the necessary steps so that you gain the necessary confidence to do it on your own (for obvious security reasons).

If you have any questions about this article, please add a comment below or reach us through your favorite social media, we look forward to hearing from you!

Important Disclaimer: The content of this article or any content from Crypto-Coach.io is for educational purposes only and is not investment advice. Investors must do their due diligence before making any type of investment decision.

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