More than just internet money, so just, what is Bitcoin, then? This peer-to-peer payment technology offers much more benefits than the promise to become rich.
In this section, start learning more about bitcoins, how they are created and what gives them a price.
New bitcoins are generated by a competitive and decentralized process called “mining”. This process involves that individuals are rewarded by the network for their services. Bitcoin miners are processing transactions and securing the network using specialized hardware and are collecting new bitcoins in exchange.
The Bitcoin protocol is designed in such a way that new bitcoins are created at a fixed rate. This makes Bitcoin mining a very competitive business. When more miners join the network, it becomes increasingly difficult to make a profit and miners must seek efficiency to cut their operating costs. No central authority or developer has any power to control or manipulate the system to increase their profits. By design, every Bitcoin node in the world would reject any attack or transaction which does not comply with the rules.
Bitcoins are created at a decreasing and predictable rate, unlike Fiat currency (Dollar Bill). The number of new bitcoins created each year is automatically halved over time until bitcoin issuance halts completely with a total of 21 million bitcoins in existence. At that point, Bitcoin miners will probably be supported exclusively by numerous small transaction fees
You can exchange $1, $5, or $11.26 USD worth of fiat currency for BTC at any time.
A Bitcoin can be broken into smaller pieces, just like a dollar bill can be broken down into pennies or $1.00 into cents.
Bitcoin can be divided to 8 decimal places, where 0.00000001 BTC is the minimum unit which can be processed in a transaction. Called a “Satoshi” in honor of the founder of Bitcoin. If necessary, however, the protocol and software can be modified to work with smaller amounts.
There are many disputes on how to call units smaller than 1 bitcoin. The most popular terms are:
Bitcoins aren’t backed by anything, right? Wrong. Bitcoins has value because they are indeed a useful and validated form of currency.
Bitcoin strongly share characteristics of money (durability, portability, fungibility, scarcity, divisibility, and acceptability) based on the properties of mathematics rather than relying on competitively controlled industries (like gold and silver) or the trust in central authorities (like fiat currencies or government-issued currency).
In short, Bitcoin is backed by mathematics. With these core attributes, all which is required for any form of money to hold its value is trust and adoption. Bitcoin’s continued rise in value can be contributed and measured by its growing base of users, merchants, startups, and innovations.
It’s good to remember, where you live in the world, you may not face the same economic challenges or opportunities as others. Some may take access to a bank account or the ability to sell low-cost goods for granted (i.e., 2nd or 3rd world countries). Still, bitcoin’s value comes only and directly from the people willing to adopt/accept them.
The price of a bitcoin is determined by supply and demand.
When demand for bitcoins increases, the price increases, and when demand falls, the price falls. There is only a limited number of bitcoins in circulation and new bitcoins are created at a predictable and decreasing rate, which means that demand must follow this level of inflation to keep the price stable.
It’s still early. Bitcoin’s market cap in comparison to Gold, Oil or Derivatives markets is still relatively small by caparisons. Thus, it doesn’t take significant amounts of money to move the market price up or down, making the price of bitcoins volatile.
When a person loses access to his/her wallet, it has the effect of removing bitcoins (money) out of circulation. Lost bitcoins, still however remain on the blockchain just like any other bitcoins accounted for in the ledger.
Remember, lost bitcoins remain dormant forever because there is no way for anybody to access the wallet without finding the private key(s) which would authenticate and allow them to be spent/moved again. Because of supply and demand, when fewer bitcoins are available, this scarcity drives higher demand and value increases to compensate.
With the implementations of SegWit (Segregated Witness) and Lightning Network protocols, the Bitcoin network already processes a much higher number of transactions per second than previously in the past.
Still, at this moment, it’s not entirely ready to scale to meet the level of major credit card payment networks. Over time these limitations will be lifted, as future requirements are discovered, tested, and implemented.
Much like app updates and patches, the Bitcoin network continuously goes through a process of optimization to meet the growing demand.
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