How Bitcoin works, what is Libra, BTC, and all you need to know

Is Bitcoin becoming more acceptable?

Bitcoin is a cryptocurrency introduced back in 2009. Satoshi Nakamoto is the false identity used by the author of this digital currency. He developed Bitcoin, developed the first blockchain database, and wrote the Bitcoin white paper as well. The real identity of the brains behind all this brilliance is still unknown to the world. An easier way to explain Bitcoin would be calling it online cash, except that it has no third parties like banks involved. 

A lot of noise surrounding Bitcoin is about it being an asset for investment. Many people buy it hoping for its value to increase, and then sell it for profit. Since Bitcoin is decentralized, it is not tied with any country, government, or bank, so it has fewer regulations and eases international transactions. Small businesses find it convenient, too, as they can avoid the credit card fee and any other miscellaneous charges. 

Bitcoin and other cryptocurrencies are known for their transparency of rules, making it an alternative to traditional fiat money. Transactions in Bitcoin are powered and verified through automation. Bitcoin is not a physical currency. It only exists virtually on a public ledger where everyone can access it. The use of Bitcoin is the same as fiat money for buying goods and services. However, it is not as widely accepted and used so far. 

How Bitcoin Works?

Bitcoin is a digital currency, first of its kind, that accommodates instant transactions. The individuals or companies that address the relevant blockchain are called miners. Nodes are the systems or servers directly connected to the Bitcoin network and store the blockchain on it to pursue further actions. Whenever you send Bitcoins from your wallet, the information is passed on to every node on the platform. This where a miner attends to it and performs a process called mining on it.

Once mining is done, the action is verified and converted into a hash. Hash is a string that connects one block in the chain to the next. The miners, in return, are rewarded in the form of Bitcoin. The distribution of Bitcoins continues but declines with time. This is where the difference between Bitcoin and traditional banks comes in. Fiat money is released from banks based on the growth of goods and services where Bitcoin follows a predetermined algorithm. 

Mining


Mining is the process that ensures the new Bitcoins are released for circulation. Mining requires complex computational problems to be solved, discovering a new block, which is then released and added to the chain. Transactions across the entire chain are also monitored and assisted by mining. Miners are returned for their actions in the form of rewards, which usually are Bitcoins. As mentioned above, the reward is declining, so after releasing every 210,000 blocks, the reward is halved. The Blockchain started rewarding with 50 Bitcoins, but after its third halving in May 2020, it now offers 6.25 Bitcoins after every block release. The rewards you yield from mining vary depending on the hardware you use for mining. To set up your mining rig for high rewards, you must have a high-end Graphics Processing Unit or an Application Specific Integrated Circuit. 

Bitcoin’s peak value

Bitcoin was launched in 2009, and up until 2015, hardly anyone considered it vital. However, the crypto market boomed when in 2017, Bitcoin hit its peak value where one Bitcoin was equivalent to almost $20,000. There are stories of people making fortunes out of this sudden rise in value. Since then, the market has been a little quiet as the price fell back within the range of $7000 to $8000. 2020 is now witnessing another rise in Bitcoin value as it started the year standing at $8000, and currently, one Bitcoin is worth over $18,000. 

However, only time will tell if this sudden rise is temporary because of the increase in demand for digital currencies because of the pandemic, or will it stay this way. 

Mining is just an option; there are other ways you can follow if you wish to buy Bitcoins.

Where & how to buy a Bitcoin?

Here are some options to buy a Bitcoin:

Bitcoin Wallet

Before you buy Bitcoin, you need a place to store your coins. This is where a Bitcoin Wallet comes in. You need to download Bitcoin Wallet before you can buy Bitcoins. A Bitcoin Wallet is available as an application for your desktop, as well as your smartphone. 

A Bitcoin Wallet is a digital wallet that you can use to store your digital currency. A digital wallet that any Bitcoin holder needs to perform actions on their digital currency. You can use your Bitcoin Wallet to store, send, and receive Bitcoins. Since Bitcoins are not physical coins, a Bitcoin wallet is also only a program and not a physical wallet. A digital wallet uses public and private keys created by a mathematical encryption algorithm. These keys are strings of numbers and letters combined.

A public key identifies the user and is visible on the public ledger as well. In contrast, the private key plays the same role as a password, which is needed before performing any actions using the wallet. Just like passwords, a private key must also be kept secret and not shared with anyone. 

Documentation Required

A Bitcoin Wallet user must verify their identity for security reasons and as a part of anti-money laundering policy. These processes are monitored by the US Securities and Exchange Commission. To verify, the officials will see your personal documents like your driving license and your social security number. 

Documents required vary based on the level of verification you wish to get; different verification levels have different limits to the amount of cryptocurrency you can withdraw. 

Payment

After you have your wallet ready and verification done, you can use traditional payment methods to buy a Bitcoin. Debit cards, credit cards, and bank transfers all work for buying a Bitcoin. Once you complete the process, your Bitcoin(s) is transferred to your digital wallet. Whether or not you can buy Bitcoins or use all of the payment methods mentioned above depends on your location. Not all countries support the process, while others do it with strict limitations. You can buy Bitcoins through a Bitcoin exchange. An exchange is an online platform for trading cryptocurrencies discussed in detail further in the article. 

Crypto Exchange

A crypto exchange is an online marketplace where you can buy Bitcoins. Exchanges are your source of connection with Bitcoin; this where you pay your traditional money to buy the digital currency. Crypto exchanges accept debit card and credit card payments, which charge a higher fee than a wire transfer, which is cheaper. The concept of the role of a crypto exchange is very similar to a stock exchange market or a foreign exchange market. 

Most exchanges also offer a crypto wallet service, but it is suggested that you do not use it for too long. Find a more secure wallet and keep your coins there; a multi-signature facility is a sign of good security on a crypto wallet. Some examples of good exchanges are Coinbase, CEX.io, and Binance. 

Other ways to buy Bitcoin

Exchanges are the most common way to buy Bitcoins, but not the only way. There are other methods you can use, for example, Bitcoin ATMs and Peer to Peer exchanges. 

A Bitcoin ATM is a machine like any other usual ATM where you insert cash to purchase Bitcoins, then transfer securely to your digital wallet. The easiest way to locate a Bitcoin ATM is to use Bitcoin ATM radar; it helps you with a list of Bitcoin ATMs closest to your current location. 

Another great way to buy Bitcoin is to use a Peer to Peer exchange. A P2P exchange is where there is no anonymity between users. A user may share their desires of buying or selling a Bitcoin on the platform. This gives buyers an option to search through a series of offers and look for the most suitable one. Some commonly used sources for P2P exchanges are Bisq and Agora Desk. 

What is Blockchain?

Before we get into complex details, let’s try to understand it in simpler terms. Blockchain is a type of database that uses a different method of storing data compared to traditional ways. The database simply is a set of information stored digitally. 

Now, let’s get into the details of how blockchain works and secures data. A blockchain can be imagined as a collection of blocks where each block carries a chunk of data. Every time a block is filled with information, it is chained with the rest of the blocks. This forms the ‘blockchain.’ It is followed by a freshly generated block that stores the information that comes next. A blockchain is known for its transparency and decentralization. All systems that run a blockchain can view all transactions being made on the system, thus empowering the idea of transparency and decentralization. 

So, blockchain is chunks of information, stored in blocks, all chained together. Every time a block is added to the chain, it is given a timestamp of the exact time added to the chain, which helps maintain a timeline on the entire database. blockchain allows information to be recorded and distributed but does not allow editing in it. Blockchain follows three major different consensus algorithms which are Delegated Proof of Stake, Proof of Stake, and Proof of Work. The purpose of these algorithms is to follow and uphold the characteristics of the network which include decentralization and transparency as well.

Decentralization and Transparency in Blockchain

Decentralization is an aspect of blockchain which is used by the idea of Bitcoin. Decentralization means that a single blockchain is being used by different individuals across the globe where everyone can record and view the data on it, but no one can edit it. This leaves that blockchain as an undisputed database as it has no rightful owner, yet everyone can use it. This method is used to store Bitcoins in a blockchain. Every transaction ever made on Bitcoins is stored in the blockchain, and it is available to all users to view. blockchain does exist in a centralized form as well. For example, a company uses blockchain to store employee information, and it is only accessible to company systems all under one roof. 

Unlike other databases, data in a blockchain is completely transparent. This allows every Bitcoin to be traceable. In case a crypto wallet is hacked, and its contents are moved, it will be visible to everyone where they are moved and stored—hence making it very difficult to hack or steal someone’s Bitcoins. To view live transactions on a blockchain, you may use blockchain explorers, or you may need a personal node. A node is a system that stores Bitcoin’s blockchain and runs its code. 

Security on Blockchain 

If you are planning to invest in Bitcoin, you must understand the idea of security behind its entire mechanism. So, every block in the Bitcoin blockchain is assigned a Hash code after being added to the blockchain. This code is generated using a mathematical algorithm that generates a string of letters and numbers. Once added to the chain, it becomes irreversible. For example, a hacker tries to steal a Bitcoin from someone, they will end up altering their blockchain, and the hash code on the blocks that he intervenes with will change. Now, the code will not match with all the other users on the blockchain, making it easily traceable. 

The only way one can successfully alter a previous block is by reaching a consensus from 51% of the nodes. Considering Bitcoin is a huge network, it is nearly impossible to use this approach and go unnoticed. This ensures the extreme levels of security on any blockchain.

The legality of Bitcoin use by country

The legal status of Bitcoin varies from one country to another and has different regulations in different states in the same country. While some states have made it legal and allow trading in all ways, others have completely banned its use. This is because different agencies and courts have classified Bitcoin differently. Despite all the inconsistencies, all countries have some general laws revolving around Bitcoin.

The United States

The US treasury classifies the Bitcoin as a convertible cryptocurrency and legalizes its use; it is taxed as property by the IRS. However, if a business uses cryptocurrency as a service, it needs to be registered with FinCEN, enforce the Anti-money laundering program, and keep records and report back to FinCEN.

Canada

Canada legalizes the use of Bitcoin within the country but ensures a banking ban on it. To deal with virtual currencies in Canada, a company must be registered with Fintrac and comply with regulations like implementing compliance programs, keeping the required records, reporting suspicious or terrorist-related transactions, etc. 

China

Although Bitcoin is legal in China, in 2013 People’s Bank of China decided to cease financial institutions from involving in Bitcoin transactions. By 2018 the bank had even cracked down on mining operations closing many stations. So the banking ban on Bitcoin transactions stands in China. 

Europe

Entire Europe has legalized the use of Bitcoin, including the United Kingdom. As of 2017, the UK declared Bitcoin as unregulated and started treating it as a foreign currency by applying similar rules and regulations. 

Africa

Except for Algeria, Egypt, and Morocco, all African countries allow Bitcoin under different regulations. 

The Americas

All of the countries in the Americas allow the use of Bitcoin except for Ecuador and Bolivia. On the other hand, Colombia partially allows its use as it has a banking ban in place. 

Eurasia

Eurasia consists of two countries, Russia and Cyprus. Cyprus legalizes Bitcoin’s use, whereas Russia holds a banking ban on it but allows its use otherwise.

Rest of Asia

The rest of Asia includes Central Asia, South Asia, West Asia, East Asia, and Southeast Asia. Among these parts of Asia, only Nepal and Pakistan are the two countries that have completely banned Bitcoin use. Vietnam, Indonesia, Cambodia, Taiwan, Bangladesh, Saudi Arabia, Jordan, and Iran are the few countries that allow the use of Bitcoin with partial limitations like banking ban or do not consider it legal as a payment tool. The rest of the countries in these regions completely allow Bitcoin transactions. 

Paypal and Bitcoin Joining Hands 

Paypal announced on October 21, 2020, that it would permit Bitcoin’s use on its platform. Paypal is one of the biggest and most widely used payment systems in the world, and its integration was huge for Bitcoins. The breaking of this news led to a sudden rise in Bitcoin’s value. 

READ: PayPal and Venmo to accept Bitcoin and other cryptocurrencies

The service of selling Bitcoins through Paypal was now available to all Paypal account holders. It did not require any separate activities or new accounts to get started. However, for now, the Paypal account does not allow the use of cryptocurrencies from a Paypal digital wallet for purchasing goods and services and sharing the currency with your friends or relatives. Although this limitation faced a backlash but to explain the reason Paypal’s service terms emphasized on “Buying and selling crypto assets is inherently risky, and crypto-assets are not insured by the Federal Deposit Insurance Corporation (FDIC).” 

The limitations are a result of risk management factors from the payment network. Other coins expected to follow soon on the Paypal platform are Litecoin, Bitcoin Cash, and Ethereum.

Facebook Introducing Libra 

Facebook announced its own cryptocurrency Libra back in June 2019. Back then, it was projected to release in 2020. However, now the situation is changed, and the projected release date of the new digital asset is around January 2021. The exact date of release depends on when it receives the approval to operate as a payment service by the Swiss Financial Market Supervisory Authority, also referred to as FINMA. 

Libra’s initial plan was to launch in association with existing currencies like USD and Euros. However, it was reported later that Libra would only be introduced as a single coin where one each is backed by one USD

Compared to Bitcoin, there are a few ways Libra is very different. For instance, unlike Bitcoin’s decentralized ledger, Libra uses a permissioned blockchain where only a few trusted parties can add transactions. This is one of the reasons many deny to accept Libra as a cryptocurrency. Since it defies the one unique aspect, every digital currency holds, i.e., decentralization.

LiteCoin

Just like Bitcoin, Litecoin is another cryptocurrency, and it is fourth-largest by market capitalization. Litecoin was introduced in 2011, two years after Bitcoin. Although the world mostly talks about Bitcoin when discussing cryptocurrencies, Litecoin is one virtual currency without any link to Bitcoin that has managed to stand out and become word of mouth.  

In terms of the working model, storage, and transactions, LiteCoin is quite similar to Bitcoin. Still, it does not stand any close to Bitcoin in terms of market value. One LiteCoin is currently valued at $78. 

However, one area where Litecoin stands ahead is the cap of total possible production. While Bitcoin can release up to 21 million coins, LiteCoin has the maximum limit cap of 84 million coins. This stat shows how LiteCoin holds massive potential to grow in the future. 

Bitcoin Cash

Bitcoin Cash is what we can call a spin-off of Bitcoin, or in software terms, it’s called a fork. A fork is a process where the source code of one software can start development on a different product. Bitcoin Cash was started in 2017. However, a year later, it split into two, forming Bitcoin Cash and Bitcoin SV.  

Bitcoin Cash currently sits at third when it comes to market capitalization, and a single coin is worth $285. Bitcoin cash network is known for its high-speed transactions, which leads to shorter wait times for its users. Bitcoin cash can perform much more transactions in a second compared to Bitcoin. The speed can also be affected by the traffic operating at a given time. Also, the high speed comes at a price. The security of Bitcoin Cash can be considered a bit compromised compared to Bitcoin.

Cryptocurrencies have been operational for over a decade now, with Bitcoin leading the charge. However, it still faces constant ups and downs, not just in terms of value but also in different governments and organizations’ criticism. This is also considered one of the reasons why the original author kept their identity a secret. Since these decentralized payment methods put traditional money and governments at risk, the governments could have united against that one man and taken legal action. 

READ: Bitcoin hits an all-time high of almost $20,000

Whether Bitcoin and other cryptocurrencies will become a primary source in the near future and replace the fiat money can still not be said. Do you think Bitcoin has a future and will take over as the primary form of currency? Let us know in the comments.

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