Beginner’s Guide: What is Bitcoin (BTC), and how does it work?

Not only bitcoin is the first crypto-currency, but it is also the best known of the more than 5,000 cryptocurrencies that exist today. The financial media avidly covers every new dramatic rise and every dizzying drop, making bitcoin a fixture on the landscape.

While this rampant volatility may grab headlines, it doesn’t make bitcoin the best choice for novice investors or people looking for a stable store of value. Understanding the ins and outs can be tricky – let’s take a closer look at how bitcoin works.

What is bitcoin?

Bitcoin is a decentralized digital currency that you can buy, sell, and trade directly, without an intermediary like a bank. See the article: Top ETH Whales Rack Up SHIB, APE, MANA, Amid Crypto Bloodbath. Bitcoin’s creator, Satoshi Nakamoto, originally described the need for “an electronic payment system based on cryptographic evidence rather than trust.”

Every bitcoin transaction that has been made exists on a public ledger accessible to everyone, making transactions difficult to reverse and forge. It’s a matter of design: Due to its decentralized nature, bitcoins are not backed by the government or any issuing institution, and there is nothing to guarantee their value other than the proof embedded in the core. of the system.

“The reason it is worth money is simply because we as people have decided it has value – like gold,” says Anton Mozgovoy, co-founder and CEO of the services company. Holyheld digital financials.

Since its public launch in 2009, bitcoin’s value has increased dramatically. While it once sold for less than US$150 per coin on October 26, 2021, one bitcoin is now selling for almost C$38,000 in May 2022. As supply is limited to 21 million coins, many are skeptical. expect its price to continue to rise over time, especially as more and more large institutional investors begin to view it as a kind of digital gold to protect themselves from market volatility and price volatility. ‘inflation.

How does bitcoin work?

Bitcoin is built on a distributed digital record called blockchain. As the name suggests, blockchain is a set of interrelated data made up of units called blocks that contain information about each transaction, including date and time, total value, buyer and seller. , as well as a unique identification code for each exchange. See also: Worrying Polkadot News: Nearly 130 Million Polkadot (DOT) Locked in Parachains in Q1 2022, Report Says. The entries are chained together in chronological order, creating a digital chain of blocks.

“Once a block is added to the blockchain, it becomes accessible to anyone who wants to view it, acting as a public ledger of cryptocurrency transactions,” says Stacey Harris, consultant for Pelicoin, a distributor network automatic cryptocurrencies.

The blockchain is decentralized, which means that it is not controlled by a single organization. “It’s like a Google Doc that anyone can work on,” says Buchi Okoro, CEO and co-founder of the stock Exchange of African crypto-currencies Quidax. “No one owns it, but anyone with a connection can contribute. And when different people update it, your copy updates too. »

While the idea that anyone can modify the blockchain may seem risky, it’s actually what makes bitcoin trustworthy and safe. For a transaction block to be added to the bitcoin blockchain, it must be verified by the majority of all bitcoin holders, and the unique codes used to recognize users’ wallets and transactions must conform to the correct pattern of encryption.

These codes are long, random numbers, which makes them incredibly difficult to generate fraudulently. In fact, a fraudster who guesses your Bitcoin wallet key code has about the same chance as someone who wins the Powerball lottery nine times in a row, according to Crypto Aquarium’s Bryan Lotti. This level of statistical randomness of the blockchain verification codes, which are required for every transaction, greatly reduces the risk that anyone can perform fraudulent Bitcoin transactions.

How does Bitcoin mining work?

Bitcoin mining is the process of adding new transactions to the bitcoin blockchain. This is a difficult work. See the article: Here’s why Solana, Cardano, and Avalanche prices are up today. People who choose to mine bitcoin use a process called proof-of-work, deploying computers in a race to solve mathematical puzzles that verify transactions.

To incentivize miners to continue racing to solve puzzles and support the global system, Bitcoin Code rewards miners with new bitcoins. “This is how new coins are created” and new transactions are added to the blockchain, says Okoro.

At first, it was possible for an ordinary person to mine bitcoins, but this is no longer the case. Bitcoin’s code is written in such a way that it makes solving its puzzles increasingly difficult over time, requiring more and more computer resources. Today, Bitcoin mining requires powerful computers and access to massive amounts of cheap electricity to be successful.

Bitcoin mining also pays less than before, making it even more difficult to recoup rising compute and electricity costs. “In 2009, when this technology first appeared, every time you got a stamp, you got a much larger amount of bitcoins than today,” says Flori Marquez, co-founder of BlockFi, a cryptocurrency wealth management firm. . “There are more and more transactions [maintenant, donc] the amount you receive for each stamp is less and less. By 2140, it is estimated that all bitcoins will have entered circulation, which means that mining will not release any new coins, and miners may instead have to rely on transaction fees.

How to use bitcoin

In Canada, people generally use bitcoin as an alternative investment, allowing to diversify a portfolio outside of stocks and bonds. You can also use bitcoin to make purchases, but the number of vendors that accept cryptocurrency is still limited.

Some of the big companies that accept bitcoins include Microsoft, Newegg, and Overstock, which is based in the US but ships to Canada. There may also be some smaller local retailers or websites that accept bitcoin, but you’ll have to do some research.

You can also use a service that allows you to connect a debit card to your cryptocurrency account, such as the Visa Shakepay card, which works like a Visa card wherever accepted, but converts stored cryptocurrencies in your account at the Shakepay cryptocurrency exchange in Canadian dollars on the trader side. There are other prepaid credit and debit cards in Canada that do the same thing.

In other countries – especially those with less stable currencies – people sometimes use cryptocurrencies instead of their own currency.

“Bitcoin offers the ability for people to store value without relying on a government-backed currency,” Montgomery explains. “It gives people an option to hedge against the worst-case scenario. You already see people in countries like Venezuela, Argentina, Zimbabwe – in heavily indebted countries, bitcoin is getting massive traction. »

That said, when using bitcoin as a currency, and not an investment, in Canada, there are some tax implications you should be aware of.

Thomas Estimbre
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