What is Bitcoin and How Does it Work?

When the world’s richest person Elon Musk tweets and supports a virtual currency, the world will ramble. Bitcoin jumped after that single tweet. Are you still unsure what exactly a Bitcoin is? Bitcoin is not only the first cryptocurrency, but it is also the most well-known of the over 5,000 cryptocurrencies currently in use. Bitcoin has become an integral part of the landscape, with financial media breathlessly covering each new dramatic high and stomach-churning fall. Let us find answers to what is a bitcoin and how does it work?

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What is Bitcoin?

It was the first cryptocurrency, and it was launched in 2009. It is decentralized digital money that may be bought, sold, and exchanged without the use of a middleman such as a bank. Satoshi Nakamoto, Bitcoin’s creator, first described the necessity for “an electronic payment system based on cryptographic proof rather than faith.”

It’s similar to an electronic version of cash. You can use it to buy goods and services, but few stores accept it, and several nations have outright banned it. However, some businesses are beginning to see its expanding power. For example, in October of last year, PayPal, an online payment provider, announced that its clients would be able to purchase and trade Bitcoin.

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Baby Doge, doo, doo, doo, doo, doo,
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Baby Doge

— Elon Musk (@elonmusk) July 1, 2021

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How Does Bitcoin Work?

Each bitcoin (trading symbol “BTC,” though “XBT” is also used) is a digital file saved in a computer or smartphone’s digital wallet. To understand how bitcoin works, you’ll need to know the following words and some background information:

Blockchain: It is driven by blockchain, an open-source programme that produces a shared public record. Each transaction is represented by a “block” that is “chained” to the code, resulting in a permanent record of the transaction. Blockchain technology is at the heart of over 10,000 cryptocurrencies sprouting up as a result of Bitcoin.

Private and Public Keys: A bitcoin wallet has two keys: a public key and a private key. These keys operate together to allow the owner to initiate and digitally sign transactions, proving authorization.

Bitcoin Miners: Using high-speed computers, miners or members of the peer-to-peer protocol independently confirm the transaction, usually within 10 to 20 minutes. For their efforts, miners are paid in bitcoin.

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How Does Bitcoin Make Money?

Its value is determined by supply and demand, and because demand fluctuates, the cryptocurrency’s price is very volatile. Apart from its mining, which necessitates technical knowledge and the purchase of high-performance computers, most people buy them as a kind of currency speculation, betting that the US dollar value of one bitcoin will rise in the future. However, this is difficult to forecast.

What is Bitcoin Wallet and How Does it Work?

Wondering how to store your virtual currency and how to use it. Two types of digital wallets can be used to store bitcoins:

• Hot wallet: A trustworthy exchange or provider stores digital currency in the cloud, which may be accessed via a computer browser, desktop, or smartphone app
• Cold wallet: A portable encrypted device, similar to a thumb drive, that allows you to download and carry your bitcoins

A hot wallet is connected to the internet, whereas a cold wallet is not. To download bitcoins into a portable cold wallet, you’ll need a hot wallet.

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Pros & Cons of Bitcoin

Cons of Bitcoin

• Volatility in prices: Speculators rushed into the bitcoin market in 2017, causing the price to skyrocket. If you bought Bitcoin in December 2018, the recent gains are fantastic news; those who bought in 2017 when the price was racing toward $20,000 had to wait until December 2020 to recoup their losses
• Hacking Concerns:  While supporters claim that bitcoin’s blockchain technology is more secure than traditional electronic money transfers, hackers have found bitcoin hot wallets to be a lucrative target
• Limited Use: AT&T became the latest company to accept bitcoin payments in May 2019, joining Overstock.com, Microsoft, and Dish Network. These businesses, however, are the exception rather than the rule. The use, as if today, is limited
• SIPC does not provide any protection: If a brokerage collapses or funds are stolen, the Securities Investor Protection Corporation guarantees investors up to $500,000, but it is not covered

Pros of Bitcoin

• There’s a lot of room for expansion:  Some investors who buy and hold Bitcoin are betting that as the currency matures, it will gain more trust and become more widely used, increasing its value
• Transactions are private and secure at all times, with fewer potential fees: Once you have bitcoins, you can send them to anyone, anywhere at any time, cutting down on the time and potential cost of every transaction. Personal information such as a name or credit card number is not included in transactions, which removes the possibility of customer information being taken for fraudulent purchases or identity theft
• The capacity to bypass traditional banks and government agencies: Following the financial crisis and the Great Recession, some investors are eager to embrace a decentralized currency that is fundamentally independent of traditional banks, governments, and other third parties

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Can We Convert Bitcoin to Cash?

Bitcoin, like any other asset, may be exchanged for cash. People can do this on a variety of cryptocurrency exchanges online, but transactions can also be done in person or over any communications network, allowing even small enterprises to take bitcoin. It does not have an official mechanism for converting to another currency.

What is the Use of Bitcoin?

It was created as a means of transferring money over the internet. The goal of the digital currency was to create an alternative payment system that was free of central control and could be used in the same way as existing currencies.

Is Bitcoin Legal in India?

It has not been sanctioned or regulated by any central government in India as a means of payment. Furthermore, there are no established laws, regulations, or standards for resolving conflicts that may emerge when dealing with them. As a result, bitcoin transactions have their own set of dangers. However, given this context, it is impossible to conclude that bitcoins are unlawful, as there has been no prohibition on bitcoins in India so far. 

In a judgment issued on February 25, 2019, the Supreme Court of India ordered the government to develop cryptocurrency regulating laws. The case was rescheduled for hearing in the second week of July 2019 after being adjourned in the hearing on March 29, 2019.

We hope now you are aware of What is bitcoin and how it works along with the pros and cons. We hope the information provided was helpful. Stay connected with Leverage Edu for educational content and amazing quizzes!