Modules for Personal Finance
Introduction to cryptocurrencies
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All about Bitcoin
In recent years, Bitcoin has gained tremendous popularity with many resorting to investing in this asset in the hopes of creating long-term wealth. But then, what exactly is Bitcoin?
Bitcoin, is a digital currency that is encrypted using a technology known as cryptography, leading it to be named as a cryptocurrency. Unlike the more traditional forms of currencies, there is no physical form to bitcoins. They’re completely digital and use a decentralized public ledger, known as the blockchain, to store all the transactions that have ever taken place.
The blockchain is accessible to everyone and once a transaction is recorded in the blocks in a blockchain, they cannot be reversed, altered, or faked. This makes Bitcoin one of the most secure currencies out there right now. That’s not all, currently it is the largest cryptocurrency in terms of value in the entire world as well.
Who invented Bitcoin?
The earliest known record of Bitcoin was in the year 2009. The idea for the cryptocurrency was derived from a white paper published under the pseudonym Satoshi Nakamoto. Till date, no one knows who created Bitcoin or who the pseudonymous character Satoshi Nakamoto was.
While some theorize that the cryptocurrency was invented by an individual, while others seem to believe that it was a group of individuals. However, despite journalists and individuals trying for years to find out who the creator of Bitcoin is, they’re been largely unsuccessful.
How does Bitcoin work?
To understand how Bitcoin works, we’ll have to first understand how traditional currencies operate.
Let’s take a traditional fiat currency like the Indian Rupee. It has a central entity, the Reserve Bank of India, that’s responsible for the supply and control of the currency. Now, when you want to transfer the currency to another individual, you would have to rely on middlemen like banks, financial institutions, and credit card companies. These middlemen levy a certain fee for using their framework to make payments and transfer funds.
Bitcoin, on the other hand, is completely decentralized. This effectively means that there’s absolutely no central entity like the Reserve Bank of India for the creation, supply, and control of the digital currency.
Since this type of cryptocurrency works on Peer-to-Peer (P2P) technology, it doesn’t need any middlemen like banks, financial institutions, or credit card companies for an individual to transfer the digital money to another individual.
This makes Bitcoin a completely open payment network that almost any individual with an internet connection can make use of. And seeing as the Bitcoin blockchain is completely transparent and available to everyone, you don’t have to worry about unscrupulous individuals altering the transaction entries. Even if an attempt to alter the entry is made, it can be found quite easily since it wouldn’t match with the entries on other network computers in the blockchain.
Also, in order to ensure scarcity of the largest cryptocurrency in the world, Bitcoin has been designed in such a way that there’s an upper limit to the number of coins that can be mined, which is 21 million. Till now, around 19 million Bitcoins have already been mined, leaving just 3 million left to be created. However, since mining of the digital currency keeps getting tougher and more complex, the last Bitcoin is likely to be mined only by the year 2140.
What is Bitcoin mining?
To put it simply, Bitcoin mining is basically the process of creating new Bitcoins. It involves solving extremely complex mathematical problems and puzzles using exceptionally powerful computing devices. By solving these computational puzzles, Bitcoin miners can discover new blocks, which are added to the blockchain.
And as a reward for discovering new blocks and adding them to the blockchain, miners receive a certain amount of Bitcoins. As of May 11, 2020, the reward for discovering a new block is 6.25 Bitcoins. One of the major drawbacks to Bitcoin mining is that it is a very energy intensive process and is super expensive since it involves investment in specialized hardware, processing units, and thermal management systems.
How can I make money using Bitcoin?
The easiest way for individuals to make money using Bitcoin is by trading. There are several cryptocurrency exchanges that facilitate trading of the largest cryptocurrency in the world. However, that’s not the only way.
You can also make money by mining Bitcoins, although it requires significant amounts of investment on your part, generating very little rewards which may not be able to fully compensate for the efforts that you put in.
With this, you must now be aware of what Bitcoin is and the key concepts surrounding the digital currency. In the next chapter, we’ll take a look at the origin of cryptocurrencies and how they came into being.
A quick recap
- Bitcoin, is a digital currency that is encrypted using a technology known as cryptography.
- Bitcoins are completely digital and use a decentralized public ledger, known as the blockchain, to store all the transactions that have ever taken place.
- The earliest known record of Bitcoin was in the year 2009. However, no one knows who created Bitcoin.
- Bitcoin is completely decentralized, which means that there’s no central entity responsible for the creation, supply, and control of the digital currency.
- Bitcoin mining is basically the process of creating new Bitcoins. It involves solving extremely complex mathematical problems and puzzles using exceptionally powerful computing devices.
- Only 21 million Bitcoins can ever be mined, out of which 19 million has already been mined.
- Bitcoin mining is a very energy intensive process and is super expensive since it involves investment in specialized hardware, processing units, and thermal management systems.
- The easiest way for individuals to make money using Bitcoin is by trading in the asset through cryptocurrency exchanges.
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