Bitcoin: How does it work?

The focus is now on it! Over the last few months, crypto-currencies have been on a tear. Their rates are exorbitant, and they are producing a lot of demand. Their past, on the other side, is far from being a long and happy river... Bitcoin, the firstborn, is a prime example! Bitcoin has come a long way from being an unknown virtual currency created by the enigmatic Satoshi Nakamoto in 2009 to one of the highest performing financial assets in all categories.

Cryptocurrencies fascinate because they are a mix of utopia and truth, but they are also a mystery to many new investors. How do they function? Was it a smart decision? Let's travel back in time to the days of the gold diggers and revisit the amazing past of crypto-currencies!

Once upon a time... crypto-currencies

Bitcoin: the genesis

The subprime mortgage crisis slammed into 2008 a few years ago. What had to happen amid Lehman Brothers collapse and the eruption in government debts occurred: a global economic downturn.

The banks were kept responsible in the eyes of the world.

Though everyone's hopes are low, a mystery guy (or several?) going by the alias Satoshi Nakamoto suggests a whole new way to send money amongst people without going through a bank or some other middleman. This is a positive thing, since banks are a major contributor to the current economic downturn.

The aim is to eventually liberate ourselves from the yoke of the banks and return capital to the citizens.

A lovely utopia that comes just in time!

So who is Satoshi Nakamoto, exactly? It's the alias of the individual or group of people who designed and developed the Bitcoin network between 2009 and 2010. On October 31, 2008, his name was first mentioned.

Years later, we also haven't been able on attach a face on the guy who invented cryptocurrencies. It's a Conan Doyle-worthy story. Some believe it was a computer scientist from Ireland, although others believe it was a Japanese mathematician or even a Finnish economist.

Or a nutshell, the ambiguity persists...

Some Bitcoin-related information:

  • There are a finite number of Bitcoins available (21 million). We have already mined 88 percent of these Bitcoins as of today.

  • Every four years, the amount of Bitcoins generated is split by two (this is called Bitcoin halving). Every ten minutes, 50 Bitcoins were produced in January 2009. It has been about 6.25 Bitcoins every 10 minutes since May 2020.

  • Bitcoin is by far the most lucrative venture of any kind. It has risen by 950,000 percent between 2010 and 2020!

Why are there just 21 million Bitcoins available?

First, there is a central bank in a fiat or state currency (a decision maker). You don't have one in Bitcoin; the Bitcoin protocol is controlled by no physical individual. This is a challenging idea to understand. Compare this process to the internet to get a deeper understanding. We all use it on a daily basis, but it is not controlled by a single body. Bitcoin is the same way. As a consequence, it's a decentralized protocol with no central authority. As a result, the cumulative number of Bitcoins in existence has been decided by a computer algorithm from the beginning.

Second, Satoshi Nakamoto desired that Bitcoin have an inherent scarcity similar to gold. As a result, it's an advantage that gets scarcer over time. Its worth is measured by its scarcity, which is determined by supply and demand.

Did you know?

Cryptocurrencies suck up a lot of resources!

According to a Bank of America survey, cryptocurrency-related greenhouse gas emissions are skyrocketing. They've grown by 40 million tons in two years.

The network already absorbs 0.4 percent of the world's energy. That's almost the same as the Netherlands, and it produces the same amount of greenhouse gas as American Airlines' crude!

Why is this the case? These are super-powerful machines that operate 24 hours a day, as we'll see below. Furthermore, China (particularly in Xinjiang) is home to three-quarters of the world's mining resources, with coal-fired power plants providing 80% of the country's electricity.

How does cryptocurrency work?

Blockchain: what is it?

Without blockchain, there is no cryptocurrency. It's the foundations of a crypto-currency, kind of like the matrix. To be more specific, the blockchain is a ledger and a method of preserving records. However, it has a range of distinctive features:

  • The blockchain is unchangeable: it can't be altered or withdrawn.

  • In contrast to a digital database, the blockchain is spread globally. Anyone may become a blockchain node, which gives them access to a full and integral copy of the blockchain.

The objective is to ward off any and all attacks.

The advantages include:

  • it is accessible 24 hours a day

  • it seldom falls down

  • it is incredibly reliable

What is the easiest way to construct a cryptocurrency? It's necessary to note that building a blockchain is incredibly complex. It necessitates a significant amount of money. Fortunately, since 2017, you've had the option of building your cryptocurrency on top of an established blockchain. The blockchain Ethereum is a fantastic illustration of this. It is the second most important cryptocurrency in terms of market capitalization, and more than 80% of new ventures are developed on the Ethereum blockchain.

As a consequence, although there are 5,000 separate coins, just 400 different blockchains operate (approximately).

→ Also read: What is Bitcoin Mining ?

Mining: the road to gold

A blockchain, as we previously said, is unchangeable. This is a reality that mining guarantees.

But, what exactly is mining? In fact, this term refers to a decentralized monitoring scheme. Simply placed, mining is used to strengthen the network by inserting additional blocks after the previous ones have been added: mining = securing a block in order to inject it into the blockchain. There are massive sheds crammed with machines from floor to ceiling. These machines can ensure if all blockchain transactions are legal (Example of invalid transaction: a person who would spend funds that he does not have).

Roles include:

  • Ensure that all transactions are complete and reliable

  • Make the transactions irreversible

Did you know?

For the following factors, gold remains a benchmark today:

  • It is unaffected by time.

  • It's interchangeable.

  • It's useless: until the advent of electrical components, it couldn't be used to produce anything. As a result, it was exempt from industrial pricing. As a result, it's a fantastic unit of measurement. A miner validates a block of transactions every 10 minutes, and is then injected into the blockchain. However, how are these miners compensated?

Each purchase earns them a fee. It is, however, comparatively poor and it is unaffected by the number of transactions. The commission would be virtually similar if they trade for 1 dollars or 1 million dollars.

As a result, whoever secures the block is credited with Bitcoins, which were 50 BTC in 2009 and are now 6.25 BTC. The miner who successfully secures the block receives a payment of 6.25 Bitcoins.

Be mindful that a single miner would not earn 6.25 BTC. This bitcoins are distributed among all miners who contributed to the block's security. Nuggets are granted to each user (for example 0.00050 BTC).

However, as you might be aware, this monetary share is limited in the long run due to the fact that the actual number of Bitcoins in circulation is limited to 21 million.

Thanks to InstantCloudMining you can start mining now and earn up to 0.05 BTC daily. How ? ICM App is the first app to not only offer the fastest mining algorithm but also AES Encryption which is the most secure encryption at date.


→ Also read: Why you should invest in Bitcoin

Did you know?

To draw a comparison with gold, they are referred to as miners. Bitcoin miners would use their processors in the same manner as gold miners used pickaxes to search the precious metal.

Cryptocurrency: How to invest?

Making the right choices

The cardinal law is restraint, whether you're a beginner or a professional. That is why, in order to purchase cryptocurrencies safely, you must take the following steps:

  • Open an InstantCloudMining account.

  • Once you've created your account, you'll have to choose your cryptocurrency Bitcoin or Ethereum for the moment.

  • Often bear in mind that this business is highly unpredictable. For eg, it fell by more than 85% in 2018, after having risen by 17 times in 2017.

  • Tip: Don't look at day-to-day prices. This is a medium/long term investment.

You have 2 choices when it comes to holding your cryptocurrencies:

  • You sign up on InstantCloudMining and open an AES 256 secured ICM Wallet. You have the equivalent of the safest cloud storage in this situation.

  • Choose a physical hardware wallet (similar to a USB key) to hold your cryptocurrencies. In this scenario, there is no chance of cheating or crashing. But take caution not to misplace it. For instance, the eTorox Wallet, the Ledger Nano X, and the Trezor Model T.

Good to know: Bitcoin's price in 2021 may be remarkable, considering its current valuation of $46,000. Don't be alarmed! Up to 8 decimal places can be separated into 1 bitcoin.

Cryptocurrency: institutional investors are getting involved

The year 2020 is the year of change

The year 2020 will be known as the year global investors first joined the cryptocurrency sector. However, several institutions were skeptical of engaging in cryptocurrencies.

Do you realize that? Microstrategy, a corporation headquartered in the United States, has the biggest Bitcoin portfolio: over $4 billion. Holding dollar reserves is currently risky for this company's CEO.

As a consequence of:

  • the Covid-related economic downturn

  • Capital generation in 2020: In 2020, 20-30% of the dollars in circulation in the United States would have been produced.

  • debt held by the nation

According to Microstrategy, holding the money in Bitcoins rather than dollars is much more profitable.

This is a true transformation, since the economy was always solely dominated by people. And it's just getting started:

  • Deutsche Bank is in the process of establishing a cryptocurrency trading desk for its clients.

  • Goldman Sachs is following suit.

  • JPMorgan recommends its retail investors to include a 1% Bitcoin exposure in their portfolio.

  • Bitcoin derivatives are also available from BlackRock.

  • ETFs (exchange-traded funds) are investment funds that trade on the Toronto Stock Exchange.

  • Central banks such as the Federal Reserve and the European Central Bank are also creating their own crypto-currencies (planned for 2026 for the ECB).

  • China is also experimenting with its own cryptocurrencies.

It's worth remembering that blockchains will be used to:

  • centralized: as China intends to do

  • decentralized: for example, Bitcoin

  • Like what Facebook is doing with Diem in the center (ex Libra).

The global recession is the primary source of this tsunami. The pandemic has offered this sector a big lift, equivalent to Zoom or digital services such as Netflix, Prime, or Disney +.

Facebook has joined the fray

Facebook revealed in 2019 that it will launch its own cryptocurrency, the Libra. The Libra, unlike Bitcoin, has a set price: 1 Libra = 1 dollar. As a result, we were confronted with a scheme that resembled a commodity rather than a capital investment.

The aim is for any Facebook or Instagram consumer to have their own Libra wallet, which they can use to swap money or make transactions on Facebook-connected platforms.

The American officials, on the other hand, have pounded their fist on the table. The set price of Libra is in doubt. Rather than relying entirely on the currency, Facebook desired to use a basket of currencies (euro, yen, dollar...). Facebook might have built a real currency for doing so. Is Facebook imagining itself as a central bank?

Mark Zuckerberg's company has learnt its lesson and has changed the name of the cryptocurrency to Diem, which is based solely on the dollar.