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What are Bitcoins and How they are created?
23Feb 2021

Recently, the digital currency Bitcoins price reached as high as $49,000 mark.

This has suddenly increased the interest of common folks regarding bitcoins. So, before starting to play with bitcoins, it is necessary to know about the game and its rules in general.

This article walks you through the world of cryptocurrency, bitcoins, mining of bitcoins and how you can trade in the bitcoins.

Cryptocurrency

Currency is an instrument through which we buy goods and services. Every country has its own currency that is regulated by its Central Bank.

For example, Currency of India is Rupees and it is regulated by the Reserve Bank of India. We use these currency notes to buy a packet of Maggie or an ice-cream.

Similarly, Cryptocurrency is also a currency that is used to buy goods and services online across countries. It is a digital currency and it is not regulated by government or bank of any country.

Mostly, these currencies are used for trading purpose. For example, they are traded just like stocks where one person purchases some bitcoins and keeps holding them until he gets a price higher than what he paid.

In simple terms, today I buy a pen worth Rs 20 and after some days when some else is ready to buy it for Rs 30, then I sell this pen at a profit of Rs 10. This is called the trading.

Need of Bitcoin

After the financial crisis of 2008, Satoshi Nakamoto created Bitcoin with an aim to create a decentralized currency that did not depend on middlemen like banks. He argued the following benefits of the Bitcoins:

Democratic: No single central authority would manage the bitcoin, instead, it is to be minted, circulated and audited by thousands of users.

Hard to Manipulate: Government agencies cannot intercede by manipulating the currency.

Worldwide Usage: Person sitting in Las Vegas can trade bitcoin with someone sitting in Mumbai at a very low cost.

Importance of Cryptocurrency

Currently, more than 6,700 different cryptocurrencies are traded publicly and their total value is more than $1.6 trillion. This shows the popularity of cryptocurrency these days.

More and more people are trading in Bitcoin believing it is the currency of the future as a result the price of bitcoin is increasing day by day.

The technology behind cryptocurrencies i.e. blockchain is much more secure than the existing payment system like online banking.

How Bitcoins are Generated?

Bitcoins are not made of any physical thing rather they are present somewhere in the digital space. It is generated and added into the circulation by bitcoin miner.

Mining is a complex process which uses the concept of blockchain for the generation of bitcoins.

Blockchain

Blockchain is a distributed network where a record of all bitcoin transactions is stored.

To understand blockchain, let us consider an example of train. There are number of wagons in a train that carries goods.

Similarly, there are series of blocks in a block chain and whenever a trade is made through cryptocurrency platform, the details of the transaction are coded and entered into theses blocks.

This information is then broadcasted to a huge network of users called bitcoin miners.

Bitcoin Miners

The process of bitcoin generation includes the transactions of trading of bitcoins and the miner. The following events take place:

First, a trade of some bitcoins take place in the world.

Now, the miners start packaging some of these transactions into a block.

Miners compete to add next block to the blockchain like that in a train.

To do so, the miners need to solve a computational problem which is called proof of work to assign the block an identifying code called hash.

Now, the successful block which is added into the train is verified by other miners and is finally added to the blockchain. This process makes the bitcoins secure and prevents fraudsters from creating fake bitcoins because this block has to be verified by a vast number of users.

Only one block can be added at a time and it takes nearly 10 minutes to add one block.

The miner who succeeds in solving the equation first and adds the next block to the chain gets a set amount of bitcoin as a reward.

Why should not everyone become a miner instead of trading?

It is because, earlier even a laptop could have generated a bitcoin but that is not possible today. Now there are dedicated groups of tech geeks who install machines like miner and large number of powerful hardware to generate bitcoins. So, chances of a common man to crack the equations and mine bitcoin is very less. Moreover, the electricity cost is very high to mine bitcoins.

Quick fact, around 66% of the world’s bitcoin mining happens in China where cheap hardware is easily available.

That is why large number of people prefer trading in the bitcoins in open market instead of mining.

Should you investment in Bitcoins?

Like trading of stocks, bitcoin trading is also speculative and highly volatile. For example, last year value of bitcoin was around $3000 and today it is more than $40,000. It is like a lottery system where chances are you may win big or may lose everything.

According to Warren Buffet, Bitcoins are like cheque. They help you to transfer money anonymously, then why should one pay big amount for such transfer.

Recently, Elon Musk purchased a cryptocurrency and suddenly its price skyrocketed.

So, the increase or decrease in the price of bitcoins does not depend on some strong fundamentals rather on the whims of its buyers and sellers.

Thus, one must refrain from investing their hard-earned money into bitcoins rather use only the extra cash that can be squandered without much effects on overall financial health.

How do I invest in Cryptocurrency?

Some cryptocurrency like Bitcoin is available for purchase with US Dollars or Indian Rupee, others require you to pay with bitcoins or other cryptocurrency.

To purchase Bitcoins, you need a wallet in online app that can hold cryptocurrency. There are number of apps that provide platform to buy or sell cryptocurrencies. Some of the apps are:

  • Coinbase
  • Binance
  • WazirX
  • Unocoin
  • Zebpay
  • Bitbns

How should you protect yourself while trading Bitcoins?

Whenever you are looking to buy a cryptocurrency, look for the following information:

Read about the Company. Who owns the company? If the owner is a well-known person then chances are that it is safe.

Collect information about the investors who are investing in the company. If the investors are well-known then the risk factor associated with the cryptocurrency is less.

Conclusion

Cryptocurrencies are one of the finest developments in Financial technology that has changed the way we trade money online. It has its own risk factors but what does not offer risk? Cryptocurrencies are here to stay so if you can afford it then why no go for it. But always take into the consideration your knowledge about cryptocurrency and the risk included. Rest is game of luck.