Bitcoin How It Work


How Bitcoin works

Origin of Bitcoin

Bitcoin is a digital currency that uses cryptography to control and facilitate its creation and management. This is the mode of management allows bitcoin to operate as a decentralized currency meaning there is no single central authorities that controls it. The debut of bitcoin was in 2009, shortly after the economic meltdown that saw some major companies in finance close shop and others nursing deep liquidity wounds. Satoshi Nakamoto is the presumed genius behind bitcoin and the robust blockchain technology that this digital currency runs on. Bitcoin and the blockchain technology, in general, have gained much traction in a relatively short span of time. While this was probably not expected, the success of bitcoin this far can be pegged on the various attractive features of this digital currency.

For starters, unlike conventional currency sending bitcoin from one address to another is immediate. Furthermore, the transfer fee for bitcoin is insignificant compared to the charge incurred transferring conventional currency. Additionally, bitcoin is gradually being accepted as a universal currency allowing its use anywhere across the globe. Considering that there is no central authority in charge of managing bitcoin, it is generated through a process known as mining. This is a complex process that harnesses sophisticated software and powerful computers. Real mining consumes a lot of electricity, and besides that, the general cost of mining is very high. This is the key barrier to entry in real mining. However, individuals interested in mining can engage in cloud mining which is much more affordable.


The process through which bitcoins are generated is referred to as mining, and the same term is synonymous with the verification of transactions added to the shared ledger namely blockchain. The mining process entails the compilation of transactions into blocks in a bid to solve difficult computational puzzles. Solving this puzzle leads to the creation of a new block on the shared ledger and the participant who solves it first goes ahead to claim their reward. The reward is the incentive that one receives for mining bitcoin. The block reward is the amount of new bitcoin released on the blockchain with each mined block. The block reward is the halved every 210,000 blocks which is about four years. Bitcoin was developed in such a way that only a maximum of 21million bitcoin will be in supply. It is for this reason that the block reward continues to decrease as the 21million cap is approached. In2009 the cap was 50 and 25 in 2014, and it is expected to continue decreasing.

There are two mining approaches that one can exploit, and that is real mining and cloud mining. Real mining entails the integration of powerful computers with sophisticated software to generate bitcoin. Real mining is extremely expensive due to the high cost of the equipment and software required and the high power consumption. Cloud mining, on the other hand, is relatively less expensive. Noteworthy is the fact that cloud mining is reliant on real mining. Some of the companies engaging in real mining have a provision for contracts. These contracts are packages that a potential cloud miner purchases for a particular period.

Value of bitcoin

The value of conventional currency such as the US Dollar is determined by various factors such as interest rates, consumer price index, quantitative easing and the GDP of a country among others. The value of bitcoin is however not influenced by all these factors. In fact, the value of bitcoin is influenced by three key factors namely supply, demand and market sentiment. Bitcoin is currently trading at a price of $3534, but the price keeps on changing. One can view the price of bitcoin on Currently, there is about 16.5 million bitcoins in supply bringing the bitcoin market capitalization to about$58.5 billion. A few weeks ago, the price of bitcoin was as high as $4900 per bitcoin. However, the move by China to ban ICO trading in the country sparked fear, uncertainty, and doubt that triggered panic selling. The consequence of this was a high supply of bitcoin in the market with little demand this caused the price of bitcoin to plummet.

Considering the coding of bitcoin, it was created to appreciate and not depreciate. Why this was the intention is still unclear. However, the currency has been on an appreciation streak since its launch. The supply cap set for bitcoin is one of the factors that will enable this digital currency to appreciate further. There will be only 21muillion bitcoin in supply in the world, and this threshold is expected to be reached in the year 2140. This means that once bitcoin receives a global acknowledgment, there will be very high demand for the currency since the supply will be too low for the global population. Consequently, the value of bitcoin will increase further.

Buying and selling bitcoin

If there is no central authority managing bitcoin, how then does one buy and sell bitcoin? One can buy and sell bitcoin through various platforms. The most preferred place for this purpose is cryptocurrency exchanges. A good example of such an exchange is Coinbase. You simply sign up on the website and then you receive a wallet identification number from the website. Through this unique ID, you can buy and sell bitcoin through the exchange at your discretion. Additionally one can buy bitcoin through classified service providers such as Localbitcoin. Through this website, one can buy and sell bitcoin easily and securely.

Bitcoin is still a fairly new currency concept that is currently being faced with vehement pessimism by some. However, bitcoin enthusiasts are still very confident that bitcoin and blockchain technology are on the path to revolution industries and business operations as we know them. This then means that trading in and with bitcoin should be preceded by due diligence. Despite the availability of various platforms through which one can buy and sell bitcoin, the process is fairly complex. Nonetheless, it is an exciting opportunity that anyone can opt to be a part of.

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