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What Is Bitcoin For Dummies & How Does It Work?

The name Bitcoin is an emotion for numerous investors and holders around us. If you don’t already know, BTC is the ‘gold standard’ of the crypto industry (thanks to its establishment as the first-ever currency). 

However, many tech-savvy enthusiasts and keen crypto investors continue to invest in the token solely for its hype. To date, a handful of investors have a complete idea of the token and its fundamentals. 

Considering how the basics of BTC are necessary for trading, let’s look at the core aspects of Bitcoin as an investment in this blog. So continue reading if you’ve ever thought of ‘how do you explain Bitcoin to a beginner?.’

Bitcoin For Dummies: What Is The Token About?

Bitcoin holds its position as the first token in the industry. BTC was launched with a 9-page whitepaper explaining how the token introduces the concept of decentralization and how it could be the next big thing. 

It was invented as a means of alternate currency by a person going by the name of Satoshi Nakamoto in 2009. To date, nobody knows who Satoshi is or if it is an individual, a collection of individuals, or an organization.

Bitcoin For Dummies Explained

Beginners often have a standard question, how does Bitcoin operate? 

The answer is simple, Bitcoin operates on its network and enables safe, decentralized online transfers between accounts. The transactions usually occur without any middleman (bank or credit union) to mediate and verify transfers. 

This implies that two individuals may send BTC to each other at any moment, anywhere in the globe. Interestingly, the entire transaction is held over BTCs private, decentralized network where the entire information is stored publicly and has no hierarchy controlling it. 

Thanks to its decentralized nature, no government, organization, or other entity controls the network. The entire transaction takes place with the help of encryption keys rather than tax IDs, names, or social security numbers, which could put users in danger. This way, BTC conducts peer-to-peer transfers for all its tokens. 

Bitcoin Vs. Fiat Currencies: What Makes The Token Unique?

Bitcoin was launched as a token with a decentralized approach, making it a unique, alternative cryptocurrency with no control from any government or private body. Anybody may use the token and participate in the open-source software development process. 

In addition, Bitcoin is not backed by a government, unlike the US dollar and other fiat currencies. Being geographically decentralized and operating across such a large base makes Bitcoin incredibly difficult to put an end to. This project feature makes it immutable, should any government or group try to.

However, that’s not all. The way BTC is processed is what makes it unique. The Bitcoin network, which powers its fundamental operations, is installed on over 10,000 devices (referred to as nodes) throughout the globe. 

Blockchain technology, also known as distributed ledger technology, is the foundation of the Bitcoin protocol. It represents a series of blocks, including all previous Bitcoin transactions.

This system is powered by nodes, which are computers running the Bitcoin software that actively verify transactions and energize the blockchain. Anyone may build a node to aid in network security, and they are dispersed worldwide.

The network cannot be controlled or shut down by a single organization, such as a bank, corporation, or government, which is why Bitcoin is decentralized.

Bitcoin For Dummies 2023: What Adds To BTCs Value?

The core fundamentals of any project make it unique, and it’s the same for Bitcoin. Apart from all the hype and its position as the world’s largest crypto asset by market capitalization, here are some fundamentals that add to its value:

  • Limited Supply

The same market dynamics that affect the price of other products and services also decide the value of Bitcoin. Prices are probably going to rise if there are more buyers than sellers. Conversely, the price often decreases when there are more sellers. Like the stock and real estate markets, among other open markets.

Bitcoin’s primary source of value is its rarity. Often referred to as the industry’s gold, BTC is a commodity with qualities similar to cryptocurrency’s. However, it is limited to 21 million tokens, of which 18.5 million tokens have already been mined. 

This leaves the market with only 2.5 million existing BTC tokens, adding to the high demand and limited supply factor. Besides, the Bitcoin network is designed to permit the creation of new tokens at a set pace. Sadly, this pace is programmed to decrease over time, adding rarity to the limited supply of the token. 

  • Price & Demand

Thanks to its market presence of over a decade and its recent highs of $70,000, institutional and retail investors have become interested in Bitcoin, pushing the demand for the token. Bitcoin has also gained popularity due to its rising media coverage and company owners praising the token’s value. 

What’s more? Bitcoin has also gained popularity in nations like Venezuela, with severe inflation and depreciating currencies. It is also well-liked by people who transfer large quantities of money for nefarious and unlawful purposes.

This indicates that a combination of a gain in demand and a decrease in future supply has driven up the price of Bitcoin. However, it still experiences boom and bust cycles in its price. For instance, the price of Bitcoin had a surge in 2017, followed by a protracted trough, two rapid spikes, and downticks through 2021, which continued to 2022.

  • Cost Of Production

Like other commodities, manufacturing costs are a major factor in setting the price of bitcoin. The cost of producing one Bitcoin is the sum of the infrastructure and power required for mining multiplied by the direct fixed expenses for running the operation. 

It further includes an indirect cost associated with the algorithm’s degree of difficulty. This brings us to the concept of Bitcoin mining. 

Bitcoin Mining For Dummies 

Beginners often jump into mining Bitcoin without a thorough idea of the process. However, by definition, Bitcoin mining is the process that involves digital validation of Bitcoin transactions over the network before its added to the public ledger. 

Interestingly, the process involves solving complex cryptographic hash puzzles before they verify different blocks of transactions. Here, a network of miners competes to decrypt an encrypted number to mine the Bitcoins in the trade. The first miner to successfully decrypt the question receives BTC as a reward, alongside any transaction fees.

However, mining is often criticized, mainly because it consumes a lot of computing power to solve the hash and unlock a block to receive the reward. Miners usually spend a lot of money on several pricey mining types of equipment. Additionally, the Bitcoin mining process uses a lot of power. 

However, no institution or organization guarantees its value beyond the general public’s opinion on its worth, which is shown at any given time by the market price of BTC.

Now You Know

This brings us to the end of our blog on Bitcoin cryptocurrencies for dummies. Keeping the core basics in mind, we hope you know whether or not to invest in Bitcoin. Remember, while BTC is one of the safest investment options in the industry, it’s always wise to know the entry point of the token and research well before taking an entry. All the best!

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