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How Does Bitcoin Work?
At this point, many are still confused and conflicted about what Bitcoin actually is. Is it a currency or a payment network? Is it something else entirely? Fortunately, defining what Bitcoin is isn’t that difficult. Essentially, Bitcoin is software and it’s purely digital, so don’t be fooled by the countless stock images you see online of shiny gold coins that supposedly represent Bitcoin.
Bitcoin is the most successful cryptocurrency, inspiring countless imitation projects. However, despite the plethora of crypto projects available now, Bitcoin still remains the largest by market capitalization.
Bitcoin is built on something known as a blockchain, otherwise known as a distributed digital record. As you may have inferred, it is essentially a link body of data, and it’s composed of blocks that contain information regarding each transaction ever made, as well as the date and time, buyer and seller, and other relevant information. Each entry is listed chronologically, which ultimately creates a digital chain of these blocks.
Whenever a block gets added to the overall blockchain, just about anyone is able to view it, which means it functions more like a public ledger for crypto transactions. Blockchain is decentralized, which means that not just one organization controls it. You could even say that it’s like a shared spreadsheet that anyone can edit or change.
Some people might think that the fact that anyone can edit the blockchain is a risky business. However, this feature is actually what makes Bitcoin quite secure. You see, to add a transaction block to the Bitcoin blockchain, the majority of holders need to verify first.
At the time of writing, Bitcoin’s price is sitting at $65,898.37, but looking back, BTC’s value hasn’t always been that high. For the past 13 years, investors of this crypto have had a rough and bumpy road. For instance, BTC’s value skyrocketed from $1 in April 2021 to $32 in June of the same year. That’s a whopping gain of 3,200% in only 3 months.
Although, that massive spike was later followed by a drastic fall, and Bitcoin’s value was at $2 by November 2011. Fortunately, its value seemed to improve quite a bit by the following year, as it rose from $4.80 in May up to $13.20 by August.
Since then, BTC’s value has been through several spikes and declines. However, it wasn’t until 2020 when Bitcoin’s price began to burst once again, thanks to the economical shutdown caused by the global pandemic. The beginning of 2020 saw BTC at $7,200, but investors began to fear what would happen to the global economy due to the shutdown. As such, this caused Bitcoin’s value to rise tremendously.
By November, investors were trading Bitcoin for $18,353 and by March 2021, Bitcoin’s price reached an all-time high of more than $60,000. Prediction for BTC’s future varies, depending on who you ask. Some believe BTC would reach $300,000-$500,000 per coin by 2030, while others predict that it will see a massive downtrend within a decade.
How to Buy Bitcoin
Investing in BTC may seem daunting, but it’s actually not that difficult to understand once you understand the basics. Before you decide to buy Bitcoin, there are some things you need first, including a secure internet connection, a crypto exchange account, a payment method, and documents that verify your personal identification if you’re using a Know Your Customer (KYC) platform.
It’s also highly recommended that you also have a personal wallet other than your exchange account. Now that you’re all set, here are the basic steps to buying Bitcoin:
Choose a Crypto Trading Service
Naturally, the first step is to decide which crypto trading service or venue you want to use. There are countless popular trading venues out there for buying crypto, such as payment services, brokerages, and cryptocurrency exchanges, among others. Out of all these options, the most convenient one would probably be cryptocurrency exchanges, since they have a variety of features as well as more crypto options compared to other venues.
If you sign up for a cryptocurrency exchange, you can easily buy, sell, and hold your crypto as you see fit. As a general rule of thumb, it’s always best to use an exchange platform that lets you withdraw crypto to your personal online wallet for safety purposes. Although if you’re looking to trade crypto, this is a feature that may not be of that much importance.
Connect Your Exchange
Once you’ve decided which exchange you want to use, you’ll want to collect all your personal documents. Depending on which exchange you’re using, you may need documents such as pictures of your driver’s license or your Social Security number. Other exchanges may even ask for your employer and source of income.
Your region or country also plays a role in what kind of documentation you might need, as some countries have different laws and rules as others regarding these matters. In fact, you could even compare this entire process to something akin to how you would normally set up a typical brokerage account.
Once your exchange of choice has verified your identity to be legitimate, you’ll need to connect a payment option. Most of the time, you should be able to connect your bank account directly, or even a debit or credit. Although, it’s not recommended for you to purchase crypto using your credit card because the crypto market is extremely volatile.
While Bitcoin is, in fact, legal in the United States, there are some banks out there that stop crypto-related deposits or even question them. As such, it’s best if you check and make sure that your bank accepts such deposits.
Make a Purchase
At this point, you can go ahead and buy BTC or any other crypto you want. These days, crypto exchanges have become more and more mainstream. In fact, they’ve grown quite a lot in terms of features and liquidity.
In recent years, cryptocurrency exchanges have grown so much that you could even say they have the same level of features as stock brokerage platforms. There are different ways you can invest via these exchange platforms nowadays, and most of them provide limited orders and markets, while others offer stop-loss orders.
Place It in a Safe Place
Lastly, it’s time for you to store your Bitcoin in a safe place such as a Bitcoin wallet. Keeping your crypto in your personal wallet and not in the exchange platform itself ensures that you have full control of the private key leading to your crypto.
If you’re a Bitcoin or crypto enthusiast, you probably already understand what these Bitcoin wallets are all about. However, newbies might find all this information quite overwhelming. As such, let’s break it down slowly at a pace that’s easy to chew and swallow.
A Bitcoin wallet is essentially a type of digital wallet that you use to either send or receive Bitcoins. You can think of it like your regular, physical wallet. However, instead of storing coins or paper money—physical currency—Bitcoin wallets store cryptographic information needed to gain access to BTC addresses. But these wallets aren’t just limited to Bitcoin, as some can also be used for other cryptocurrencies as well.
There are different types of Bitcoin wallets, which we’ll explain below:
Desktop wallets, as implied by its name, are installed on either a laptop or a desktop computer. Many enthusiasts prefer this type of wallet because it gives you complete control over your digital wallet. Other desktop wallets even offer extra functionality and features, such as exchange integration and node software.
However, it’s not exactly the most secure wallet out there since computers can be easily compromised. Some of the more popular desktop wallets are Electrum, Bitcoin Core, Armory, and Hive OS X.
Mobile wallets are essentially the same as desktop wallets, however, you install them on your smartphone or any other mobile device instead of your computer or laptop. These wallets are convenient because you can easily access them wherever you are, as well as make quick and easy payments in physical stores using QR codes of near field communication (NFC).
Some samples of popular mobile wallets are Hive Android, Bitcoin Wallet, and Mycelium Bitcoin Wallet, and they’re typically supported by both Android and iOS devices. Before choosing a mobile wallet, however, it’s best if you do thorough research first because there have been many instances wherein malware disguises itself as a Bitcoin wallet.
Web wallets are great because you can easily access them whenever you want using your preferred device. It’s as simple as checking your email! However, just like desktop wallets, security is also a cause for concern for web wallets. Not only is it prone to malware and phishing, but there have also been instances of counterparty risks.
Popular web wallets include Gemini, Coinbase, and Blockchain.
If you’re looking for the most secure type of Bitcoin wallet, you’ll want to go for hardware wallets. This type of digital wallet stores private keys on a physical device, which means that you won’t be able to access them online. Hardware wallets look like USD flash drives, and whenever you want to make a transaction on your computer, all you need to do is plug in the device.
Bitcoin Cash is a fork of the original Bitcoin and was created in August of 2017. Bitcoin Cash differs from Bitcoin in that it increased the size of its blocks. This caused it to process even more transactions, not to mention a significant improvement in its scalability.
Another fork took place in 2018, resulting in the existence of Bitcoin Cash ABC and Bitcoin Cash SV (Satoshi Vision). Bitcoin Cash is named the way it is because it utilizes the original Bitcoin Cash client.
How to Mine Bitcoin
“Bitcoin mining” is a fairly common term in the crypto world, and no, it’s nothing like physically mining for jewels in caves. Bitcoin mining refers to the process of adding new transactions to the Bitcoin blockchain, and it’s an incredibly challenging task.
Those enthusiasts who mine Bitcoin utilize a process known as “proof of work.” The act of mining Bitcoin means that these “miners” deploy strong computers to solve mathematical puzzles in order to validate the transactions.
In order to allure these miners to keep going and solving the various puzzles, they get rewarded with new Bitcoins. It’s actually thanks to Bitcoin miners that new coins are created, not to mention the fact that new transactions are included in the blockchain thanks to them.
During the early days of Bitcoin, just about anyone could mine for these coins, but this isn’t a possibility now. The Bitcoin Code has been written to ensure that its puzzles get even more difficult over time, which means miners will need more and more computing resources. Nowadays, Bitcoin mining requires you to have not only incredibly powerful desktop computers, but you’ll also need massive amounts of electricity.
Bitcoin Mining Rig
If you’re curious about how Bitcoin mining works, there are a couple of things you need to have beforehand aside from a crypto wallet. When it comes to mining rigs, there are three basic categories you need to think about, namely: CPU, GPU, and ASIC or Application-Specific Integrated Circuit.
However, the most important factor you need to consider first when choosing a mining rig is the currency you want to mine. In the past, it was possible to mine Bitcoin with just your PC’s CPU and your willpower, but now, you’ll need an impressive machine if you want to be a successful miner.
With CPU mining, you’re essentially using the processing power of your computer’s CPU to generate hashes. As mentioned, having just your CPU will no longer suffice these days when it comes to mining. If you want to try your hand at mining Bitcoin, you’ll need an extremely high-end CPU as others just won’t cut it anymore.
GPU mining is also fairly common, although it’s more complex than CPU mining. You see, it’s challenging to let several CPUs work together to achieve one goal, while it’s much easier for GPUs to do so. If you’re looking for the right GPU for mining, choosing either Nvidia or AMD is the best course of action, as they’re two of the main contenders in this industry.
That being said, having just a GPU isn’t enough to deliver the hash power you need—you need to connect it to something to make it even more powerful, and that’s where the motherboard comes into play. You’ll want to look for a motherboard that’s capable of connecting to six GPUs at the very least. If you’re able to afford something that can connect even more than that, then all the better.
Of course, the number of GPUs you’ll need won’t fit in your typical PC case. Not only that, you can’t simply leave them lying around disorganized on the floor. Naturally, you’re going to have to find a suitable case or frame for your mining rig. It’s best to invest in one that’s reliable, as it will function as the home of all your expensive equipment.
At this point, you’ll have your CPU, GPUs, and motherboard, and you’re going to need to provide power to all of them. Now, if you’ve ever tried building your own PC from scratch, then you’re probably familiar with calculating your rig’s power draw. The same concept applies to your Bitcoin mining rig, but the only difference is that you’re using even more components that require a whole lot of power.
That’s why finding the right power supply for your rig is fundamental in order for everything to work smoothly. Purchasing the right PSU is definitely an investment, so you need to think carefully.
Last but not least, we have the ASIC. The ASIC is essentially a small yet powerful computing machine and it’s created with one purpose in mind. In this case, it’s meant to mine crypto. ASICs are might powerful, and it’s definitely the most powerful option on this list. That said, they’re also really expensive and easily outdated, as newer models continuously get released.
Bitcoin and cryptocurrency, in general, have gotten so big that Bitcoin ATMs now exist. But how do they work exactly? To put it simply, a Bitcoin ATM is essentially an internet-enabled kiosk that you can use to deposit cash in exchange for Bitcoin. Although they’re typically referred to as Bitcoin ATMs, you can actually use them to exchange cash for a variety of other cryptocurrencies as well, including Dogecoin, Litecoin, Dash, Monero, and more.
That being said, calling it a Bitcoin ATM is actually inaccurate. You see, you can’t use this kiosk to convert Bitcoin into cash. Not only that, but you also can’t use it to withdraw cash, as they aren’t connected to banks at all.
Bitcoin ATMs are simply for blockchain-based transactions, and if you don’t have a digital wallet already, you can even set one up using the machine. Any transaction you make via the ATM is instantaneous, and any changes in your account will typically reflect in only a matter of minutes.
As a Bitcoin enthusiast, you’ve probably heard of Bitcoin ETFs before. ETFs refer to exchange-traded funds, and they track Bitcoin’s value. Not only that, but ETFs also trade on the traditional market instead of on crypto exchange platforms. Many investors prefer Bitcoin ETFs because they can still invest in the crypto without being required to undergo the tedious task of using a crypto exchange platform.