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What is Bitcoin & How Does it Work?

  • Bitcoin was the world’s first true form of cryptocurrency, and initially arrived on the cryptocurrency market in 2009

  • Created by an anonymous developer known only as Satoshi Nakamoto, Bitcoin has become one of the worlds best-performing investments throughout the past 10-years

  • Bitcoin exists as a decentralized transaction ledger, which is impossible to hack or edit without majority user consensus

What is Bitcoin?

Bitcoin officially turned 10-years old in 2019. Initially, the Bitcoin price was virtually zero. In fact, in 2010, Bitcoin developer Laszlo Hanyecz, used 10,000 BTC to buy a pizza, in one of the worlds earliest cryptocurrency transactions. Since 2010, the Bitcoin price has soared to as high as $20,000 per coin.

How Bitcoin Works

Despite being 10-years old, confusion still surrounds how Bitcoin works and how BTC has value. Here, well, therefore, outline how Bitcoin works for absolute newcomers to cryptocurrency.

How Bitcoin Works Compared to How Regular Cash Works

Traditional banks keep track of user deposits via a centralized transaction ledger. When customers withdraw or deposit funds, banks update balances accordingly. However, because this transaction ledger is centralized, banks can also freeze, reverse, and refuse transactions, at any time.

Like banks, Bitcoin also uses a transaction ledger to keep track of user deposits. However, the Bitcoin transaction ledger is decentralized. This means that Instead of existing on centralized IT infrastructure, the Bitcoin transaction ledger exists on millions of computers worldwide simultaneously.

The Bitcoin Blockchain & Bitcoin Mining Explained

The Bitcoin transaction ledger holds no personal information on users. Instead, of traditional account numbers, Bitcoin wallet balances are associated with unique cryptographic keys. When a user sends funds from one Bitcoin wallet to another, transactions are bundled into blocks. Miners on the Bitcoin network are then required to agree that transaction details are correct.

To verify the integrity of transactions, Bitcoin miners check every proposed transaction for conflicts. Where sufficient funds aren’t available to cover a transaction or two transactions are sent simultaneously from the same wallet, transactions are rejected.

Once blocks of transactions are verified, the Bitcoin transaction ledger is updated, and miners receive rewards by being allocated transaction fees and newly minted Bitcoin.

Digging Deeper Into How Bitcoin Works

To keep the Bitcoin blockchain secure, the Bitcoin blockchain and all transaction blocks are heavily encrypted. This prevents any third party from editing data on the network. For added security, the strength of encryption increases after every new block of transactions is processed. This means that only people who can commit resources to the Bitcoin network in the form of computing power, can participate in mining and receive mining rewards.

Can Bitcoin be Hacked?

Bitcoin transactions only complete when miners processing new transaction blocks unanimously agree that transaction details are correct. If a miner attempts to submit false transaction information to the Bitcoin network, they receive no transaction fees or other mining rewards. The Bitcoin blockchain is, therefore, secure for several reasons.

  • Bitcoin mining hardware alone costs approximately $5,000 – $15,000

  • On average, mining rigs cost $3,000 to $5,000 (per month) to operate

  • Miners who submit inaccurate information to the Bitcoin blockchain, make gross losses by forfeiting transaction fees and mining rewards

  • It is only possible to update the Bitcoin transaction ledger with false transaction information when at least 51% of all miners coordinate to submit false transaction information simultaneously

  • Because profits from any ‘hack’ would need to be shared equally between 51% of miners, there is no financial incentive to coordinate an attack

  • Any successful hack would instantly undermine the Bitcoin network, resulting in the Bitcoin price going to zero and miners realizing catastrophic losses

Bitcoin Vs. Regular Cash

As well as being more secure than traditional cash held in a conventional bank account, Bitcoin is inherently deflationary.

There will only ever be 21 million Bitcoin in circulation. Scarcity and increased Bitcoin mining difficulty is, therefore, designed to see Bitcoin appreciate in value as more coins enter circulation. Conversely, if all the physical United States Dollars in the world were ever shared out equally among U.S. citizens, each person would only receive (approximately) $1,300.

Traditional currencies like the U.S. Dollar are also debt based. Bitcoin can, therefore, be argued to be superior, as Bitcoin is not backed by debt. Nor in times of crisis, can BTC withdrawals or transactions ever be limited by banks attempting to prevent a run on deposits.

Where to Buy Bitcoin in 2019?

At Fox Exchange, new-to-market investors can buy Bitcoin instantly via credit card. Fox Exchange also makes it easy to exchange Bitcoin for a wide variety of altcoins. All that new cryptocurrency users need to remember is to learn how to create and back up a reliable wallet, before investing.