What is Bitcoin?
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What is Bitcoin?

What is Bitcoin?


Cryptocurrency is often not well understood and this earns it some bad reputation among the media. As a result, many people are poorly informed about digital money, how it is created and how it works. There is nothing wrong with that, as it is a relatively new technology, it isn’t taught in schools and you can only truly learn about crypto if you are actively searching for information. Luckily, you are looking for knowledge at the right place. So let’s begin with the most basic question about the most popular digital asset.

What is Bitcoin?

Bitcoin (BTC) is a digital currency, created in 2008 by an unknown person or organization under the pseudonym Satoshi Nakamoto. We will probably never know who is behind this name. A detailed explanation of this currency was published in the white paper Bitcoin: Peer to Peer Electronic Cash System. The white paper makes it clear that the idea of Bitcoin was to create an electronic currency to make p2p payments without the need for third-party approval, thus reducing or even eliminating the problem of double-spending. Bitcoin is deployed on a blockchain, which works without any connection to the banking system. This makes it possible for the value of this currency to be determined by its users and no one else. We could safely say that this is a currency that really belongs to the people.

Bitcoin is a cryptocurrency – digital currency that is a medium of exchange and uses cryptography to secure financial transactions. Cryptographic algorithms also control the creation of additional units (new Bitcoins), and verify the transfer of BTC funds. Bitcoin can be used by anyone with an internet access, which eliminates the need for an intermediary or banking institutions, making Bitcoin very attractive as a means for an easy exchange of value in smart banking. For example, if you wanted to send USD or EUR money from one continent to your loved ones in another, you will have to pay fees for this transcontinental transfer and most likely the recipients will also be charged by the banking operators there. Moreover, this process may take several days. This is where Bitcoin comes in handy. There are no centralized institutions in the Bitcoin system that process transfers or charge fees. You can send funds at any time of day, even on the other side of the world during the weekend, and the transaction will be processed in an hour or two maximum instead of days.

Since Bitcoin first appeared after the global economic crisis of 2008, some believe that it was the reality of the crisis that contributed most to the emergence of such independent, digital money. The idea is not so unrealistic, as it is somewhat within the realm of possibility that Bitcoin will be one of global currencies of the future. Banking institutions often charge high fees, do not carry out all bank orders and, last but not least, can freeze their customers’ accounts without good reason. Because of such drawbacks, people tend to think that banks have too much power. A crypto bank would solve all that.

Short history of Bitcoin

Sometime in 2004, computer scientist and cryptographic activist Hal Finney devised a secure system for receiving non-fungible, Hashcash-based, proof-of-work tokens and called it Reusable Proof of Work (RPoW). It was now possible to transfer cryptographic tokens from person to person. Solving the double-spend problem was achieved via RPoW by keeping the ownership of tokens registered on a trusted server. The server was designed to allow users throughout the world to verify the transaction ledger’s correctness and integrity in real time.

Fast-forward to 2008, and someone with the pseudonym Satoshi Nakamoto published a white paper introducing a decentralized peer-to-peer electronic cash system.  It was based on the Hashcash proof-of-work algorithm, but Satoshi solved the double-spend problem not with RPoW but with a decentralized P2P protocol for tracking and verifying transaction, called Proof of Work (PoW). This meant that Bitcoins would be “mined” by individual miners for a reward via the proof-of-work mechanism and then verified by the other decentralized nodes in the network. This is what we now call crypto mining.

How are new Bitcoins generated?

Bitcoins are generated by a process called mining. Utilizing powerful computer hardware, Bitcoin enthusiasts solve complex mathematical puzzles in order to generate new bitcoin units. This computational process has another important function – it maintains the security and integrity of all transactions on the Bitcoin network. The data from each transaction gets collected into a list called a block. It is the Bitcoin miners’ job is to confirm these transactions and file them into a general ledger, which is a long list of blocks known as the blockchain. Miners earn bitcoins in return for all their hard work maintaining the blockchain. The decentralized nature of the mining process ensures that the system’s data remains secure and discourages attempts at tampering with the data.

What is Bitcoin used for?

People use Bitcoin to make online payments and cheap international transactions and, like any currency, Bitcoin can be used as a unit of value in exchange for goods and services. This digital asset can also sometimes be used in your daily life when shopping, as well as for sending money to someone without waiting for approval from banks or waiting for days for the funds to arrive.

As Bitcoin adoption continues to spread, traveling the world should be easier, as people will only need one currency (no need to exchange it) and they don’t even have to carry physical money their pocket. Even now, you can use Bitcoin to buy a plane ticket, rent a car and even book a room at certain hotels, just as if you were using fiat money.

What makes Bitcoin valuable?

Bitcoin is the first global currency not controlled by any government. Whilst banks can print fiat currencies indefinitely, Bitcoin is limited to 21 million coins to be mined. About 18.5 million coins have been mined so far and, with the mining difficulty increasing exponentially over time, Bitcoin enthusiasts have predicted that the last Bitcoin will be mined around the year 2140. The smallest unit of Bitcoin is called a satoshi. It is one hundred millionth of a Bitcoin or 0.000001 BTC.

The main advantage of Bitcoin’s limited supply is that, historically, people have always prescribed more value to rare things and so the limited supply of BTC today naturally leads to an ever greater demand, thus contributing to Bitcoin’s value increase. This makes Bitcoin similar to precious metals, rare stones or paintings. The hard market cap limit of 21 million coins means there will never be more than that number of coins in existence.

Is Bitcoin even legal?

Bitcoin is legal in the USA, Japan, the United Kingdom, and most other developed countries. In the emerging markets, as well as in China and India, the legal status of Bitcoin has not been settled yet and is still somewhat unclear. Even in nation states where Bitcoin is 100% legal, it is still being taxed similarly to most other investment assets. The tax authorities consider it an investment property rather than a currency. However, things are slowly moving in the right direction. One nation state, El Salvador, officially became the first county to recognize bitcoin as legal tender in June 2021.

Bitcoin’s limitations

Like with any other currency, there are disadvantages associated with using Bitcoin:

  • Not yet widely accepted

Bitcoin is not yet widely accepted by online merchants. You still need fiat currency if you want to shop online more freely.

  • Price volatility

The value of Bitcoin is constantly fluctuating according to market demand and media narratives. While Bitcoin has managed to outperform the stock market over the long term, this kind of performance comes at the cost of high volatility

·         No buyer protection

Bitcoin transactions are immutable, meaning that once you send Bitcoin to someone, there is no way to get it back unless they send it back to you. Unlike traditional currency transactions, cryptocurrency transactions are irreversible.

·         Wallets can be lost (or stolen by hackers)

Securing your Bitcoin funds requires some basic cybersecurity knowledge and awareness. While the Bitcoin network is virtually unhackable, organizations and individuals aren’t. Most people are not ready to take full responsibility for securely storing their crypto wallet’s private keys.

How does Bitcoin trading work?

Even though the size of the Bitcoin trade market isn’t anywhere near the size of the Forex market, traders are drawn to Bitcoin because of its extreme price volatility. Bitcoin’s price is so volatile mostly thanks to it being a very young market compared to Forex.  The Forex market has been around for decades and is now worth trillions of dollars, which makes it less volatile and not quite as exciting or as profitable to trade as Bitcoin.

Naturally, as traders profit the most from the volatility in the market, more volatile markets are more attractive to traders. Traders can make money both when the price goes up or down (by longing and shorting the market). This is why many consider Bitcoin’s price action to be very tradable, hence the continuous proliferation of so many new crypto exchanges and trading platforms in recent years. Another reason traders are attracted to Bitcoin is the fact that, whilst traditional markets close for the weekend, the crypto market is open 24/7. In other words, the Bitcoin market never closes.

Bitcoin can be traded just like anything else that can be traded in the stock market, commodity market or Forex market. Here are the two basic trading strategies that apply to every market, including Bitcoin:

·         Swing Trading 

Swing traders get into a position on a certain asset and hold that position longer than 24 hours. Swing traders are prepared to hold a position for several days, several weeks or even several months. This is the easiest approach to take in a trending market and has resulted in many skilled traders becoming Bitcoin billionaires in the last several years.

·         Day Trading

Day traders prefer to enter and exit their positions within less than 24 hours. Sometimes a position can be held for as short a time as a couple of minutes (when day trading on lower timeframes).

These Bitcoin trae strategies can be applied to spot trading and to leverage trading. Many crypto exchanges offer Bitcoin leverage trading on their futures trading platform. Coinhaven is one of those exchanges, offering leverage between 2x and 100x on its Bitcoin futures platform. Leverage trading, however, is extremely risky, requires extensive knowledge of technical analysis and price action, and is generally not recommended to novice traders.

You can buy and sell Bitcoin on Coinhaven.

Published: 3 months ago 61 min to read

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