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Bitcoin has become a common word in the past few years. From print to the visual media, everyone is talking about it but not many people understand what it is or how it works.
In this article, I will be taking a look at bitcoin in detail and hopefully make it simpler to understand it. Bitcoin belongs to the category of cryptocurrencies.
So, to understand Bitcoin, you have to first understand cryptocurrencies.
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The last few years saw the introduction of a technology known as Blockchain. Blockchain was introduced as a ledger-based technology that would allow the creation of open systems that are free from centralization, more secure, and faster.
One of the key uses of this technology was the development of cryptocurrencies. This need came about due to the requirement to open up the financial systems.
Traditionally, there has been a lot of control in the financial industry, especially from the governments. The major reason for this is due to the sensitive nature of the industry.
Creators of cryptocurrencies saw a chance in blockchain to come up with a technology that would get rid of controls in the sectors.
Additionally, it would allow for free and open movement of the funds. This would work through getting rid of the role played by central banks and banks in the financial industry.
The first cryptocurrency to be produced was Bitcoin. Within no time interested developers picked up the development and, in a few years, rolled out new currencies in hundreds and later thousands.
Today we have thousands of currencies in circulation facilitated through blockchain. However, among all these currencies, the most famous and widely used one is Bitcoin.
As discussed, Bitcoin was the first cryptocurrency and this has been the main reason for its success. By taking the first in the market advantage, its acceptance has grown rapidly over the years to a position where its valuation is in billions of dollars.
How is Bitcoin Created?
By understanding that bitcoin is a cryptocurrency, then we need to know how it is created. Bitcoin came about as the first currency created through technology by a process known as mining.
This refers to the use of computer-driven algorithms to achieve a specific amount of data necessary to generate one coin. As uncomplex as it sounds, this is a very complicated process beyond the capability of a normal computer user.
Initially, when the currency was still new and less valued, it could have been possible to mine but as the value grew and coins increased, the process becomes harder.
Today, only a few big corporations with enough resources to mobilize enough technological capabilities can generate new bitcoins. In return, they hold or sell the coin in the market to create revenue.
What gives Bitcoin its value?
All currencies possess a value. That is why we use them to access goods and services. Traditionally, currencies value has been linked to the gold to ensure there is a predictable and accepted value.
This is not the case with bitcoin. Today bitcoin worth has been sustained through market forces of demand and supply. That is why it was almost transacting at negligible amounts after its introduction to the market.
However, as more people heard of it and decided to get some, the value shot up due to demand to its market prices today. The underlying concept of bitcoin creation was to use it for transactions.
Just like any other currency, it could be used in exchange for goods and services making it more acceptable and widely used in the financial system.
Today, some businesses globally are accepting bitcoin as a reliable means of exchange and more innovators are accelerating the creation of technologies to ensure transactions using bitcoin are seamless.
These are just some of the developments that sustain Bitcoin value and if everything goes well, then its value could even grow further.
Driven by the decentralization objectives, it has become a haven for individuals that want to transact unanimously because the use of the formal financial system could expose them.
Unfortunately, this anonymity created a loophole for money launderers and criminals to carry out their illegal transactions.
How to buy and sell bitcoin
Just like any other investment asset, the worth of bitcoin is based on the ability of buyers and sellers to transact. Today, brokers have begun offering the market to buy and sell bitcoins. There are three ways to get bitcoin.
You can mine it, trade it just like normal currencies or get one for speculation reasons. As mentioned before in this article, mining is one of the ways to acquire bitcoin, however, it is not accessible by the average person.
So the other two options remain as the most ideal methods of accessing bitcoin by the majority. The biggest reason for buying bitcoin is speculation.
Buying it with the expectation that it will go up in price then dispose of it at a profit. A case scenario is a few years ago, one bitcoin used to cost less than a dollar, within a few years, the price had shot up to over 20,000 dollars.
However, there is no guarantee that the price will go up as expected. The worth could also drop resulting in losing the investment. This shows that trading in Bitcoin is always a risky affair.
This, therefore, requires caution before investing in the asset. It requires a deep understanding of the market coupled with previous experience. In addition, ensure to only invest funds that you are ready to lose.
The brokers need one to have an account with them. So you have to provide your documentation for verification then if confirmed your account is opened.
This process mimics that of buying and selling shares. Once the account is ready, you are supposed to fund it to enable you to purchase the coins.
Before making an investment, take keen note that the assets you are investing in and the broker you are using are regulated and licensed. This is an important step to avoid giving your money to a fraudster.
It also protects you from taking part in a fraudulent activity that might land you in jail. The reason this is an important aspect is that bitcoin is regulated differently across the world.
A few countries allow the buying and selling of the coin while others have made it illegal to trade in it. Being a new asset, governments are still trying to develop laws that fit cryptocurrencies.
Policymaking is a tedious process that needs continuous improvement in ensuring everybody’s interests are protected.
Bitcoin is still in its advance stages of development and acceptability. No one really knows how cryptocurrencies will end up but I believe we are just starting to accept them.
In recent days, governments have announced arrangements to develop their own fiat-backed cryptocurrencies that would be regulated in tandem with the existing policies. One of the biggest setbacks of trading in bitcoin is volatility.
It is a highly volatile asset creating unpredictability in the price direction. This instability has made many investors shy away from it and brokers significantly increase the expense of trading in the asset.
However, just like any new technology, as long as the underlying and driving concept is strong, its success is almost assured.
Have you interacted with Bitcoin yet? What has your experience with it been like if you have? If you haven’t, is this something that could possibly interest you? Let me know in the comments section below.