What is BTC and How Does It Work?

Blockchain, Crypto 101, Digital Finance

what-is-btc

Despite its fame, many people are still unclear about what Bitcoin (BTC) is and how it works. Also, BTC is not the original Bitcoin protocol, as most people believe due to its popularity. This article explores everything you need to know about BTC from what it is, how it works and how you can use Bitcoin, to the value of BTC and the challenges and benefits associated with the cryptocurrency. 

What Is BTC and How Does It Work? 

Despite its fame, many people are still unclear about what Bitcoin (BTC) is and how it works. Also, BTC is not the original Bitcoin protocol, as most people believe due to its popularity. Here’s everything you need to know about BTC. 

What Is BTC? 

Bitcoin (BTC) is a peer-to-peer currency regulated by members of the blockchain network. Unlike fiat currencies, digital currencies like Bitcoin don’t rely on third parties for processing but are managed collectively by the network. When sending or receiving a BTC payment, the currency doesn’t pass through a bank, payment provider, or other entity. Instead, the transaction occurs purely between the user and the other party. 

In a sense, cryptocurrencies are the digital equivalent of handing someone cash for a good or service. But the supply of BTC is fixed and it isn’t minted or controlled by any government or central bank. 

How BTC Works 

Users transfer BTC through its decentralized network, which operates on peer-to-peer technology. As transactions occur, they are recorded immutably on the blockchain ledger. Unlike traditional financial systems, these records aren’t owned or controlled by any one person or entity. Instead, they are shared across the entire network and publicly accessible by all participants.  

Using this decentralized payment system, you can buy, sell, or transfer BTC in exchange for goods and services. You can also use BTC to buy other digital currencies via exchanges.  

How To Use Bitcoin 

Bitcoin is both a digital currency and an investment vehicle. When used as a currency, it is a secure way to transfer value in exchange for goods or services. Thanks to its rapid price increase Bitcoin is a popular alternative investment. Some users even treat BTC as digital gold, a store of value that’s independent of inflation and other macroeconomic factors. 

To do all of this, you’ll need a Bitcoin wallet. Wallets are essentially addressing where Bitcoin is stored. Wallets are protected with encryption keys that the user must retain to access them. Transferring BTC incurs transaction fees, which are paid to miners as the transactions are added to the ledger. Wallets can be hot or cold. Hot wallets are connected to the internet, while cold wallets aren’t. Once in your wallet, you can either hold your Bitcoin as an investment or use it as a payment mechanism. 

A common misconception is that Bitcoin is private. In truth, Bitcoin owners are pseudonymous, but transactions on the blockchain are publicly viewable. The blockchain’s protocols do not record your personal information anywhere. So, if you don’t publicly link yourself to your Bitcoin wallet, you’ll remain anonymous. 

The Value of BTC 

A satoshi is one-hundred-millionth of a Bitcoin, the smallest amount of BTC capable of being recorded on the ledger. The ability to fractionalize Bitcoin is extremely important for facilitating small transactions. You can buy, sell, or trade any amount of BTC you want, if greater than, or equal to, one satoshi. 

Since its inception, Bitcoin’s value has increased from less than one penny to nearly US $50,000 per BTC. The price has risen steadily due to adoption by consumers and businesses, interest from the financial industry, regulation, and endorsements from celebrities like Elon Musk. 

Unlike stocks or fiat currencies, the price of BTC isn’t linked to performance or the broader economy. This makes the currency famously volatile and allows it to act as a hedge against economic factors like inflation. Also, there is a fixed limit of 21 million Bitcoin that can be mined. At the time of writing, about 90 percent of that supply had been mined. But due to the increasing difficulty of mining, the last Bitcoin won’t be mined until around 2140. 

Challenges of BTC 

Most of BTC’s challenges are directly related to its network structure. Because of the computing power required for mining, the network is hard to scale and consumes more energy than some developed countries. Rising transaction fees also make BTC expensive to use, especially for everyday purchases. 

Bitcoin overall still faces difficulty because of legacy media reporting of criminal activity linked to the currency. Criminals often use BTC payments to obscure their transactions and avoid traditional financial institutions.  

New regulations could solve many of these problems and support BTC as an investment vehicle. In response to a surge in pump-and-dump schemes and ransomware attacks demanding cryptocurrency as payment, lawmakers have argued for new legislation. In 2021, as part of the U.S. Infrastructure Law, Congress introduced several provisions that focused on cryptocurrency and blockchain regulation which were criticized over technical details (e.g., the definition of a “broker”). President Biden also signed an “Executive Order on Ensuring Responsible Development of Digital Assets,” calling for more research into digital currencies. For now, the industry remains unregulated other than the IRS Virtual Currency Tax requirement. 

Benefits of Bitcoin 

Despite its challenges, Bitcoin also has enormous benefits. The decentralized nature of the blockchain network makes it possible to send or receive money from anywhere. And the anonymity and transparency Bitcoin offers allow users security without relying on central institutions. Transactions on the Bitcoin ledger are also irreversible, ensuring that an accurate and complete record of past transactions is always available. For these reasons, Bitcoin currencies remain the dominant force in digital currency. 

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