Cryptocurrency is something that has been trending recently in the business world, and is gaining even more popularity and traction thanks to memes and mentions by famous people, such as Elon Musk. This growth in popularity has led many people to start investing in Bitcoin, the most popular one, even though they have no clue how it actually works. However, this is still a pretty good form of marketing, and helps to bring attention to cryptocurrency. If you want to have similar success marketing your business, Brandarrow Agency can help you with that. They can digitally market your business and provide so many other helpful services as well. In this article, we are going to explain how Bitcoin and cryptocurrencies work, and hopefully give you a better understanding of them as well.
Cryptocurrencies are digital currencies that only exist electronically. They do not have central regulating authorities or governing bodies, meaning that no one decides when to make more, figuring out how many to produce, keeping track of them, or investigating fraudulent purchases. Without these standard structures in place, how does Bitcoin even function?
Bitcoin is exchanged through peer-to-peer networks. Even though Bitcoin is a digital currency, it cannot be duplicated and exploited because it is an entry on a global ledger called the blockchain, recording every Bitcoin transaction ever. When you send someone Bitcoin, you are basically adding an entry to this big ledger. This works because there are lots of people keeping track of the entries to make sure that all of the transactions are accurate, and when the records are compared, fraudulent entries are caught. The transactions recorded are blocks of information, and when stacked onto the global network they are blockchain. For every transaction that you make, you are announcing a few things to the global bitcoin network, which are your account number, the account number of the person you are sending bitcoin to, and the number of bitcoins you are sending. The people keeping track of this then add this information to the block. Bitcoins are kept safe because of cryptography, specifically keys, which make mathematical guarantees about who the money is being sent from. When you make an account called a wallet, it is linked to 2 unique keys, a private key and a public key. In this case, the private key can take some data and mark/sign it so that other people can verify the signatures later if they want, and only you have access to your private key, nobody else. You then send that signed message out to the Bitcoin Network and everyone can use your public key to make sure the signature checks out, and then add the transaction to their copy of the blockchain. If the public key works, that is proof that the message was signed by the private key and is something that you wanted to send. The time when you send the transaction is also important. For example, if you had $1,000 in your bank account and wanted to buy two things worth $1,000, the bank would honor the first purchase and deny the second one, otherwise you’d be able to spend the same money multiple times. So, if you only have enough money to pay Person1 or Person2, but try to pay them both, there’s a check built into the Bitcoin system. Both the Bitcoin Network and the wallet automatically check your previous transactions to make sure you have enough Bitcoins to send in the first place. But, because lots of people are keeping copies of the blockchain all over the world, network delays mean that you won’t always receive the transaction requests in the same order. Now there are a bunch of people with a bunch of slightly different blocks to pick from, even though none of them are necessarily wrong. This would be solved by using a cryptographic hash function, which is an algorithm that takes an input of any size and turns it into an output with a fixed size. The hash function that Bitcoin uses is called sha-256 which stands for secure hash algorithm 256-bit. Computers that are specifically designed to solve sha-256 hash problems take on average about 10 minutes and billions and billions of guesses before they get it right, and whoever solves the hash first gets to add the next block of transactions to the blockchain. If multiple people make blocks at roughly the same time, the network picks one to keep moving on which becomes the longest and most trusted chain, and any transactions in those alternate branches of the chain get put back into a pool to be added onto later blocks. The people maintaining the blockchain have a built in reward system from the service. In 2016, every time you won the race to add a block of BlockChain, 12.5 new Bitcoins were created and awarded to your account. These people are also known as miners. On November 10th 2016, 1 Bitcoin was worth 708 US dollars, so 12 1/2 Bitcoins were worth $8,850. Every single Bitcoin that exists was created to reward a Bitcoin miner. The miners are also tipped a small amount for each transaction they add to the ledger. Every 210,000 blocks, the number of coins generated with these blocks has gone down by half. What started as a reward of 50 Bitcoins decreased to 25 and 12.5. According to current projections, the last Bitcoin, probably around the 21 millionth, will be mined in the year 2140. This decrease in the number of Bitcoins is actually modeled off the rate at which things like gold are dug out of the Earth, and are designed to keep the value up. But, this is still a very risky investment choice, and will need much more further research from the investor.