What is Bitcoin?

What is Bitcoin

In our last article, Blockchain Technology, we present the fundamental functions and characteristics of blockchain. As you will now see, these attributes inevitably manifest in Bitcoin and other criptomoedas Also.

In fact, all the concepts covered in this series so far (money, digital payments e blockchain) will be remembered and applied in our understanding of Bitcoin.

Bitcoin is a Type of Digital Currency

But isn't Bitcoin Backed by Nothing?

Let's start with the basics. Bitcoin is a type of currency, like the commodity or fiat currency, allows us to store and transfer wealth.

However, instead of being a physical item like a piece of gold or a paper voucher, Bitcoin (BTC) is entirely digital and represented by code within a computer.

At this point, many are often confused as to how something intangible can have value. To demystify this concept, let's look at our article about money.

Although at one point human beings used goods or items with intrinsic value like money, we ended up replacing them with banknotes or vouchers.

The paper itself was practically useless, but each note was backed by a promise that it could be exchanged for a certain amount of gold at any given time.

However, over time, even this Golden pattern was abandoned and fiat currency was adopted. So if fiat money is not backed by any commodity, how is it nowadays universally accepted as money? What gives you value is essentially trust.

We have faith in our government's ability to enforce the use of these notes and we have faith in the mutual acceptance of the currency.

In other words, value is created when we agree that something has value. Whatever form it takes, be it a coin, a piece of paper, or even a computer code, is irrelevant.

Now that we've established that everything can derive value from the trust we place in it, let's explore why we can trust Bitcoin when there is no central authority like a government supporting it.

Bitcoin: Digitization

Bitcoin: Digitization

Before we dive into the technology and features that make Bitcoin a reliable alternative to fiat currencies, let’s briefly review our article on digital payments.

In our never-ending quest to simplify the process of completing transactions, even the physical use and exchange of fiat currencies declined.

Instead, we now record the transfer of value digitally. By having our funds stored in a bank, this institution can leverage network and mobile technologies to record transactions instantly.

As long as there is a meticulous and accurate record of who paid whom, the physical money doesn't actually need to be moved. Once again, this type of system of transaction digital only works because of the trust element.

We trust our bank's ability to record transactions, to be faithful to those records, and to keep them safe from malicious tampering.

In the absence of such a trusted intermediary, the only way for us to accept that money was sent or received would be to physically exchange it with our hands.

Again, this begs the question: how can we trust a decentralized system like Bitcoin, in which a network of users across the world participate in these record-keeping tasks? What stops people from changing records or changing codes to claim they have more money? After all, at the end of the day we are all selfish, self-interested actors.

As you may have already guessed, this is where blockchain technology comes into play. It was designed to solve all these problems and more.

Blockchain

Let's analyze how Bitcoin potentiates each of the core elements of the blockchain to position itself as a secure alternative to traditional cash.

Bitcoin: Centralization vs Decentralization

Before we answer the main question posed above, it is important to understand that a centralized system also comes with disadvantages.

Whether it's a government or a bank, putting your trust in them assumes they'll do a good job. Unfortunately, this is not always the case.

There are many examples throughout history of governments completely mismanaging their fiscal and economic responsibilities, leading to hyperinflation and, ultimately, the collapse of their currency.

Likewise, there are also many examples of financial or banking institutions that have not been able to keep funds or transaction records secure. Worse still, many of them were found to actively and maliciously deceive their customers and embezzle funds.

Part of the issue is the total control and authority these institutions have over their records and funds. There is no sensible way to see or dictate what they actually do with our money behind the scenes.

Bitcoin solves this issue by recording all transactions on a blockchain. Remember that a blockchain is essentially a public ledger that is not under the control of a single entity.

The public nature of this ledger eliminates the need to blindly trust a central institution as each transaction can be easily tracked and verified. Furthermore, it is much more difficult (almost impossible) for an attacker to tamper with these records, as there is no single point of failure.

Bitcoin is distributed all over the world with numerous copies that each would have to be modified to compromise the system. To further explore how it is possible to have a publicly maintained ledger without the worry of false or invalid transactions, we will review and expand our knowledge of blockchain.

Security and Mining

As we explained in blockchain In this article, the technology gets its name from the fact that it is essentially blocks of transaction data that link to each other as they are verified.

Let's illustrate the process with an example. You own 1 bitcoin and transfer it to a friend. Anyone can verify that their account (wallet) has the funds and that the transaction contains their unique signature.

While fake transactions are rejected, hundreds of verified transactions are grouped into blocks. Before a block can be officially added to the blockchain, making it a permanent part of the public ledger, it must meet certain requirements. The most important of them is solving a math puzzle.

This puzzle is incredibly difficult and complex, requiring a significant amount of computing power to solve.

Individuals or groups known as miners use specialized equipment to help solve these problems. An oversimplified explanation of the process is that these computers continually try different variables known as nonces (nuncio is an arbitrary number that can only be used once) until one of them gives the correct answer.

The first miner to have the correct answer adds their block to the blockchain. To prove that the miner did the job and isn't trying to add a block without actually lending their computing power, other miners test the same nonce to see if they also got the correct answer.

This automatically proves that the miner's legitimacy as having the correct nonce without spending considerable resources is essentially impossible. If everything is correct, the new block is added to all copies of the blockchain.

In addition, this correct answer also happens to be a string of characters (hash value) that works as a name or code that differentiates each block from the other.

Part of solving or getting the code right involves using the hash value from the previous block. The effect is that each valid block will have a hash value that is inevitably connected to the previous and next block. In other words, the blocks are chained together. Attempting to modify a single block will break the whole chain's mathematical logic.

Returning to the mathematical puzzle, this mechanism also works as a deterrent for bad actors. The puzzle is so expensive to solve that at this point it makes more sense to simply follow the rules.

Because? Because successfully solving the puzzle yields a reward. Each time a miner adds a legitimate block to the chain, he receives a certain amount of BTC as payment.

Furthermore, users also pay varying amounts as transaction fees each time they move their coins. The higher the fee paid, the more miners will prioritize these transactions, verify them, and add them to the blockchain.

Other Benefits of Bitcoin

A Brief History of Bitcoin Price Changes 2009-2021

a deflationary currency

The system is designed to allow a maximum of 21 million bitcoins to be mined in total. This makes Bitcoin a deflationary currency. In other words, Bitcoin is not subject to a drop in value due to the central bank's decision to print more money.

Although the miners one day they are no longer rewarded by the system, they will still be incentivized to keep their work through the transaction fees they receive from users.

Lower costs and shorter wait times

The decentralized attribute we described earlier also means lower costs and shorter wait times.

In the world of traditional finance, not only do we have to blindly trust intermediaries to manage our funds in good faith, we also have to pay them to do so.

These fees are much higher when compared to fees paid to miners. Furthermore, for money to move globally, it often must go through many institutions and processes, leading to longer wait times. For Bitcoin, any money you send goes straight to the recipient.

Anonymity

Another benefit that is somewhat counterintuitive at first is anonymity. See, although the blockchain or transaction record is entirely public and easily accessible for anyone to see, the identity of everyone involved is not.

As we mentioned, transactions are linked to unique subscriptions that work like usernames, but there are no real names. This helps protect your privacy, especially in a world that is increasingly subject to government surveillance.

What Moves Bitcoin Price?

As a decentralized currency, Bitcoin is free from many of the economic and political concerns that affect traditional currencies. But as a market still in its teens, there are many uncertainties entirely unique to cryptocurrency.

Any of the following factors can have a sudden and significant impact on your price.

  1. Bitcoin supply
  2. BTC market cap
  3. Integration
  4. industry adoption
  5. Main events

Bitcoin Trading Strategies

day trade

Os day traders take a position based on anticipated short-term movements and close it out at the end of the trading day.

swing trading

Os swing traders they capture trends as they form and hold the position until the trend runs its course or shows signs of reversing.

Scalping

The Crypto Scalpers carry out frequent intraday trades on minor price movements.

automated trading

The trading bots automate your trading processes to react to changing market conditions on your behalf.

Main Advantages of Bitcoin

To summarize, Bitcoin is a new type of currency that offers anonymity, decentralization, security, speed, economy and a mechanism anti-inflationary integrated.

Although it is only represented by lines of code on a computer, the system is so ingeniously designed that more and more people are starting to trust it, thus giving it significant value.

The blockchain technology that powers it creates a self-sustaining environment in which participants are rewarded for maintaining and protecting the system. The safer it becomes, the more people join and the more benefits everyone enjoys in the end.

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