What is Bitcoin, and how does it work?

Over the last decade, the demand for cryptocurrencies has skyrocketed. Crypto has caught the interest of speculators and seasoned investors alike. And amid all the hype, Bitcoin has secured a sweet spot in the popular imagination.

In this article, we delve into the workings of Bitcoin. Because while it generates billions in profits, the pioneering crypto poses some significant environmental concerns. Understanding what is Bitcoin and how it works, is always the first step towards the ‘DYOR’ crypto philosophy. And you should always do your research before investing!

What is Bitcoin made of?

Bitcoin is not any other coin that you can carry around in your wallet. It’s a virtual currency programmed by thousands of individual programmers who believe in the concept of it.

What is Bitcoin & Bitcoin investment?

Bitcoin is a virtual currency or decentralized digital asset. It can be sent or received using blockchain technology in a peer-to-peer fashion. The term Bitcoin is also used to refer to the underlying blockchain network itself. (On this blog, we usually use Bitcoin when we are referring to the network, and Bitcoin when we are referring to the coin).

Bitcoin has been revolutionary since its inception because it found a way to bypass the need for a centralized authority, like central banks, to transact. All the transactions are recorded on a public distributed ledger called a blockchain. All transactions can be tracked using this ledger.

Who created Bitcoin?

An unknown individual or group of individuals called Satoshi Nakomoto created Bitcoin in 2009. Satoshi was behind the white paper that was released during the coin’s launch, setting the crypto ball rolling.

Bitcoin has since turned into one of the most lucrative ventures in the world but the identity of Satoshi remains shrouded.

How does Bitcoin work?

At the heart of Bitcoin’s operation is what is called mining. Bitcoin Mining is the process by which new bitcoins come into circulation and new transactions are verified. That’s two birds with one stone. Here’s explaining how it works.

Each BTC transaction is grouped into blocks along with other transactions. These blocks in turn form a chain-like digital record—called a blockchain. This record is accessible to all users. Once the transactions are recorded, they cannot be changed, modified, or deleted. This makes blockchain tamper-free (that is, immutable).

When a Bitcoin transaction takes place, data about that transaction is added to a block. And through mining, that block of data is verified and added to the chain.

The verification and updating of these blocks are done independently by people called miners. These miners are rewarded each time they successfully mine a block. The reward is new bitcoin/s that the miner can hold or sell.

Now, every user has an equal opportunity to add new blocks and they are motivated to mine by the incentive on offer. But when there are many competitors, how do we know which user gets to mine a block and earn the reward? All miners get to compete to solve the hash or complex mathematical equation.

The decentralized nature of the network and the complexity of the hash ensure that no two users can find the answer at the same time. The person who succeeds is said to have mined a BTC.

That’s how BTC ensures that the number of bitcoins in circulation keeps increasing and transactions keep getting verified.

What is Bitcoin halving, and how does it work?

There is a problem that arises due to the fact that users are incentivized to participate in mining. The problem is this: the number of bitcoins in circulation too will be on the rise. And over time, as the supply keeps rising with continuous mining, Bitcoin can turn inflationary and cause its value to drop. To prevent this, the Bitcoin blockchain has a safeguard that counters the possibility of inflation. The safeguard is known as halving.

BTC halving is a regulative measure in the mining process that ensures that every four years, the block rewards for mining are cut in half. This is a way for the rewards system to limit the bitcoins in supply. The reward for the final bitcoin mined will be zero in value.

In comparative terms, halving ensures that the mining process is like traditional mineral mining. With intensive mining, the availability of resources is reduced. This naturally limits the mineral’s supply. The reduced supply in turn boosts the value of the mineral in supply. Likewise, BTC mining guarantees that crypto’s value keeps rising.

What are some great things about Bitcoin?

So now that you know a fair bit about BTC, let’s sum up the key plus points.

• Decentralization: This is one of the most important selling points of BTC. The currency cannot be regulated by a central authority like a bank or a government.
• Transparency: Every transaction that has ever occurred on the blockchain of Bitcoin will be visible to everyone who has access to a public ledger. Although individual user identity can never be traced, wallet addresses are stored on the network in perpetuity.
• Speed: Bitcoin is way faster than traditional banks because it takes a significantly lesser amount of time to process international transactions. While banks get caught up in a huge mess of paperwork and authorizations, BTC transfers are permissionless.

How to get Bitcoins?

There are a plethora of ways to get BTC but the easiest way is still buying on financial investing platforms like CoinSwitch. With CoinSwitch all it takes is 5-7 mins to get your KYC approved and start trading.

Bitcoin and its environmental impact

Because of the high computational power computers needed for Bitcoin mining, and due to the fact that millions of users are involved, the energy demands of the crypto giant are concerning. As mining increases, the computational power required to create new coins also keeps going up. To sum it up, Bitcoin mining and other transactions involved come with significant costs for the environment.

A study estimates that in 2022, a single BTC transaction needs 2,165 kilowatt-hours of electricity. And since most of the energy used is sourced from fossil fuels, BTC’s impact on climate change is concerning.

Things are changing, though. New data shows that close to 60% of the electricity used to power Bitcoin mining machines comes from sustainable sources. There are already a few options like proof of stake out there, so let’s hope it is only a matter of time before BTC addresses the environmental issue.

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