WHAT IS BITCOIN? HOW DOES IT WORK? IT AFFECT ON ECONOMY?
What Is Bitcoin?
Bitcoin is a decentralized digital currency that you can buy, sell and exchange directly, without an intermediary like a bank. Bitcoin’s creator, Satoshi Nakamoto, originally described the need for “an electronic payment system based on cryptographic proof instead of trust.”
Each Bitcoin transaction ever been made exists on a public ledger accessible to everyone, making transactions hard to reverse and difficult to fake. That’s by design: Core to their decentralized nature, Bitcoins aren’t backed by the government or any issuing institution, and there’s nothing to guarantee their value besides the proof baked in the heart of the system.
How Does Bitcoin Work?
Bitcoin is built on a distributed digital record called a blockchain. As the name implies, blockchain is a linked body of data, made up of units called blocks containing information about each transaction, including date and time, total value, buyer and seller, and a unique identifying code for each exchange. Entries are strung together in chronological order, creating a digital chain of blocks.
“Once a block is added to the blockchain, it becomes accessible to anyone who wishes to view it, acting as a public ledger of cryptocurrency transactions,” says Stacey Harris, consultant for Pelicoin, a network of cryptocurrency ATMs.
How Does Bitcoin Mining Work?
Bitcoin mining is the process of adding new transactions to the Bitcoin blockchain. It’s a tough job. 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 entice miners to keep racing to solve the puzzles and support the overall system, the Bitcoin code rewards miners with new Bitcoins. “This is how new coins are created,” and new transactions are added to the blockchain, says Okoro.
The average person could mine Bitcoin in the early days, but that’s no longer the case. The Bitcoin code is written to make solving its puzzles more and more challenging over time, requiring more and more computing resources. Today, Bitcoin mining requires powerful computers and access to massive amounts of cheap electricity to be successful.
Bitcoin mining also pays less than it used to, making it even harder to recoup the rising computational and electrical costs. “In 2009, when this technology first came out, every time you got a stamp, you got a much larger amount of Bitcoin than you do today,” says Flori Marquez, co-founder of BlockFi, a crypto wealth management company. “There are more and more transactions [now, so] the amount you get paid for each stamp is less and less.” By 2140, it’s estimated all Bitcoins will have entered circulation, meaning mining will release no new coins, and miners may instead have to rely on transaction fees.
How to Use Bitcoin?
People generally use Bitcoin as an alternative investment, helping diversify a portfolio apart from stocks and bonds. You can also use Bitcoin to make purchases, but the number of vendors that accept the cryptocurrency is limited.
Big companies that accept Bitcoin include Overstock, AT&T, and Twitch. You may also find that some small local retailers or certain websites take Bitcoin, but you’ll have to do some digging.
That said, PayPal has announced that it will enable cryptocurrency as a funding source for purchases this year, financing purchases by automatically converting crypto holdings to fiat currency for users.
How to Buy Bitcoin?
Most people buy Bitcoin via exchanges, such as Coinbase. Exchanges allow you to buy, sell and hold cryptocurrency. Setting up an account is similar to opening a brokerage account—you’ll need to verify your identity and provide some funding sources, such as a bank account or debit card.
Major exchanges include Coinbase, Kraken, and Gemini. You can also buy Bitcoin at a broker like Robinhood.
Regardless of where you buy your Bitcoin, you’ll need a digital wallet in which to store it. This might be what’s called a hot wallet or a cold wallet. A hot wallet (also called an online wallet) is stored by an exchange or a provider in the cloud. Providers of online wallets include Exodus, Electrum, and Mycelium. A cold wallet (or mobile wallet) is an offline device used to store Bitcoin and is not connected to the Internet. Some mobile wallet options include Trezor and Ledger.
A few important notes about buying Bitcoin: While Bitcoin is expensive, you can buy fractional Bitcoin from some vendors. You’ll also need to look out for fees, which are generally small percentages of your crypto transaction amount but can really add up on small-dollar purchases. Finally, be aware that Bitcoin purchases are not instantaneous like many other equity purchases seemingly are. Because Bitcoin transactions must be verified by miners, it may take you at least 10-20 minutes to see your Bitcoin purchase in your account.
How to Invest in Bitcoin?
Like a stock, you can buy and hold Bitcoin as an investment. You can even now do so in special retirement accounts called Bitcoin IRAs.
No matter where you choose to hold your Bitcoin, people’s philosophies on investing it vary: Some buy and hold long term, some buy and aim to sell after a price rally, and others bet on its price decreasing. Bitcoin’s price over time has experienced big price swings, going as low as $5,165 and as high as $28,990 in 2020 alone.
Consumers can also invest in a Bitcoin mutual fund by buying the Grayscale Bitcoin Trust (GBTC). However, it’s currently only open to accredited investors who make at least $200,000 or have at least $1 million net worth. This means the majority of Americans aren’t able to buy into it. In Canada, however, diversified Bitcoin investing is becoming more accessible. In February 2021, Purpose Bitcoin ETF (BTCC) started trading as the world’s first Bitcoin ETF, and the Evolve Bitcoin ETF (EBIT) was also approved by the Ontario Securities Commission. American investors looking for Bitcoin or Bitcoin-like exposure may consider blockchain ETFs that invest in cryptocurrencies' technology.
An important note, though: While crypto-based funds may add diversification to crypto holdings and decrease risk slightly, they do still carry substantially more risk and charge much higher fees than broad-based index funds with histories of steady returns. Investors looking to grow wealth steadily may opt for index-based mutual and exchange-traded funds (ETFs).
Advantages Of Bitcoin
- Potential for high returns
- Protection From Payment Fraud
- Immediate Settlement, International Transactions.
- Diversification, Greater Liquidity
Disadvantages of Bitcoin
- High volatility and potential for large losses
- Black market activity
- Unregulated and unbacked, Cyber hacking
- No refund
Bitcoin effect on The Global Economy-
The Impact of Bitcoin on The Global Economy is an emerging trend; Bitcoin has firmly made it mainstream. At one time, few people have thought that Bitcoin is only an obscure hobby or a pipe dream that will die out in the next few years. But today, the story is quite different. You can see that Bitcoin has now become a real investment opportunity and is making its way to create a severe impact in the world.
This popular type of cryptocurrency gained much attention when its price hiked from around 572.3 USD in August 2016 to approximately 4,764.8 USD in August 2017. It makes up about 64.01% of the total value of all cryptocurrencies as of 9 March 2019, with more than 7.1 million active users.
As Bitcoin is designed to transform the existing financial system and remove finance intermediaries, it has the strong potential to affect the global economy. It can function both as a safe-haven asset in some cases.
In some way, it’s an alternative method to the global financial system. Banking sectors, investors, governments, and companies have taken a real-time interest in this type of cryptocurrency.
Bitcoin in the Global Economy: Digging Through Concept
Bitcoin has some properties that authorized money, and other traditional currencies (gold, etc.) don’t. That’s why it has the power to affect the global economy. It has been long-called ‘digital currency’ for some reason. Here are some Bitcoin unique characteristics that could promote economic growth and present a game-changing global financial breakthrough:
Storage. Bitcoin only exists in digital form, and there’s no physical shape or form, just like cash. Hence, it can technically be stored only in a digital wallet. This digital wallet can quickly be restored using a seed phrase if you access it from different devices you usually use (new phones, tablets, or any other devices).
Security. Since Bitcoin is a decentralized digital currency, it was designed to eliminate the possibility of fraud by making it a real-time transaction process. Also, it does not involve third parties or intermediaries, so you have the full authority to manage and control your assets.
Portable. Unlike traditional currencies and assets, Bitcoin is easily “carried around.” It offers a portable, divisible, fungible, and irreversible digital currency. As long as you have a device to access your digital wallet, you can transact directly.
Anonymity. Bitcoin stored in the digital wallet doesn’t need to be connected to any explicitly distinguishing data. So, it’s the opposite of traditional banks that know all intents and purposes about their customers (from personal data to their financial records).
Methods of Payments. As mentioned above, Bitcoin is set out to be a digital currency and a new kind of money, which can be used as a means of payment. Today, many companies in various industries accept Bitcoin as their legitimate form of funds.
Here’s the comparison between bitcoin and other currencies (gold and fiat money) to give you a better understanding of why this digital currency is something worth talking about.
How Bitcoin Transforms Global Economy
The story of Bitcoin is indeed just getting started, but it’s already transforming the global economy. It becomes crucial to know how it will shape the global economy and market in the coming years.
Here are some visible impacts of Bitcoin on the worldwide economy.
- Shifts in Global Investments
- Separates Transactions from the Dollar
- Eliminates the Need for Middlemen
- Encourages More Overseas Transactions
- Reduces High Reliance on Fiat Money
- Regulation of Bitcoin
- Removes Barriers to Entry and Emerges New Market
- Opens Access to a Credit System
- Starts New Era of Crowdfunding
- Changes on the International Remittances Industry
- Environmentalism
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