Learn How Bitcoin Works Before Investing

Table of Contents:

What Exactly Is Bitcoin?

Bitcoin is the first and biggest decentralized digital currency in the world. Decentralized indicates that it is not supported, governed, or owned by any government, central bank, business, or agency. Bitcoin is instead governed by computer software, which anybody with internet access may download and use to monitor and verify transactions.

Bitcoin is the network of interconnected computers where the digital token resides. The currency is exclusively digital, meaning that it cannot be extracted from its digital network and hence does not exist in physical form such as paper cash. Even if you purchase it via a bitcoin ATM, you cannot store a physical bitcoin in your wallet (yes, those exist).

Bitcoin can also be used as a store of wealth and investment and be transactional money. Bitcoin is the most extensively owned and traded cryptocurrency, while dozens of others.

How Does Bitcoin Work?

Blockchain is the technology that powers bitcoin and all other cryptocurrencies. Consider blockchain to be a massive digital database (known as the ledger) that maintains the specifics of every Bitcoin transaction and distributes them across the internet to computers running the Bitcoin software. There are tens of thousands of machines running the Bitcoin software (known as nodes). Each coin uses its own blockchain. Thus, the phrases “blockchain” and “cryptocurrency” derive from the grouping of transactions into “blocks” by the computers running the software, which are subsequently added to the database or ledger in chronological order, building a chain utilizing cryptographic processes.

How Does the Bitcoin Mining Process Work?

Bitcoin mining is the mechanism through which new blockchain transactions are validated.

Bitcoin miners compete to solve cryptographic riddles to validate all Bitcoin transactions. As a result, transactions take between 10 and 60 minutes on average, depending on how much you are willing to spend in transaction fees and how certain you want to be that the transaction has been properly validated. Although this is much quicker than electronic money transfers, which may take days to accomplish, it is not as rapid as credit card transactions, which can be completed in seconds.

How Many Bitcoins Exist?

The present Bitcoin code prohibits the existence of more than 21 million bitcoin. Due to Bitcoin’s software code, this limit will be altered. There is a little more than 19 million bitcoin in circulation. The pace of issuance is typically halved every four years, bringing the total possible supply to 21 million.

Bitcoin is easily divided, enabling the purchase of modest money. Satoshi, or “sat,” is the smallest unit of bitcoin. With 100 million sats per bitcoin, bitcoin is divisible to eight decimal places, greater than conventional currencies. If a single bitcoin was $1 million, one sat would be worth one penny.

Making Use of Bitcoin

With bitcoin, individuals may transmit money to one another directly via the internet, bypassing financial institutions and credit card companies. This transaction is known as “peer-to-peer.”

Similar to how other digital wallet providers allow electronic transfers with conventional currencies, bitcoin transfers may be done on the Bitcoin network online or using a smartphone app. Unlike these other digital wallet providers, Bitcoin is an open system that anybody in the world may access and use.

Bitcoin can also be purchased as an investment. Bitcoin’s price has increased from $0.09 at its inception in 2009 to over $29,000 as of mid-May 2022, with regular large price fluctuations. Investors must be certain they can withstand such volatility and risk of loss.

What is Bitcoin Wallet?

A bitcoin wallet is simply an electronic safe in which bitcoins may be stored. It comprises random letters and numbers not necessarily associated with persons, home or business addresses, or other identifiable information. Your bitcoin wallet will have a public address, just as your bank or brokerage account has a routing number.

To transfer, receive, and access your bitcoin, you will need your public address and password-like numbers known as public and private keys.

Bitcoin fees

In most instances, people who buy, sell, or move bitcoin will incur transaction fees from the sites where they store their Bitcoin. Depending on the chosen financing source, transaction expenses can range from 0.5% to 4%.

Each bitcoin transaction incurs a network cost. This is automatically taken from the amount of bitcoin supplied, and its quantity changes dependent on some variables. The transaction costs on the core Bitcoin network change based on network congestion.

Bitcoin taxes

Bitcoin (and other cryptocurrencies) sales and other dispositions are typically taxable events. In many ways, cryptocurrencies are taxed similarly to conventional capital assets, such as equities and bonds, with short- and long-term holding period tax laws applied. Be aware, however, that crypto taxes can be difficult, especially if you are actively trading and making several crypto deals. Consider speaking with a tax expert if you have crypto-related tax issues.