Bitcoin is a form of digital cash that eliminates the need for central authorities such as banks or governments. Instead, it uses a peer-to-peer internet network to confirm purchases directly between users. Launched in 2009 by a mysterious developer known as Satoshi Nakamoto, BTC was the first and most valuable entrant in the emerging class of assets known as cryptocurrencies.
How does it work?
Each bitcoin is a file stored in a digital wallet on a computer or smartphone. To understand how cryptocurrency works, it helps to understand these terms and a little context:
- Blockchain: Bitcoin is powered by an open-source code known as blockchain. It creates a shared public history of transactions organized into “blocks” that are “chained” together to prevent tampering. This technology creates a permanent record of each transaction, and it provides a way for every Bitcoin user to operate with the same understanding of who owns what.
- Private and public keys: A Bitcoin wallet contains a public key and a private key. They work together to allow the owner to initiate and digitally sign transactions. This unlocks the central function of Bitcoin: securely transferring ownership from one user to another.
- Mining: Users on the Bitcoin network verify transactions through a process known as mining, which is designed to confirm that new transactions are consistent with other transactions that have been completed in the past. This ensures that you can’t spend bitcoin you don’t have or that you have previously spent.
How does it make money?
New Bitcoins are created as part of its mining process, in which they are offered as a lucrative reward to people who operate computer systems that help validate transactions.
Bitcoin miners, also known as “nodes,” are the owners of high-speed computers that independently confirm each transaction and add a completed “block” of transactions to the ever-growing “chain,” which has a complete, public, and permanent record of every Bitcoin transaction.
Miners are paid in Bitcoin for their efforts, which incentivizes the decentralized network to independently verify each transaction. This independent network of miners also decreases the chance for fraud or false information to be recorded, as the majority of miners need to confirm the authenticity of each block of data before it’s added to the blockchain, in a process known as “proof of work.”
Can it be converted to cash?
Like many other assets, Bitcoin can be bought and sold with fiat currencies such as the U.S. dollar. The price will depend on the current market value, which can fluctuate significantly from day to day.
If you’re looking to buy or sell Bitcoin, you have a handful of choices. But for most beginners, the simplest approach is using a cryptocurrency exchange.
Some of these are operated by online stock brokerages, and others are independent. But given Bitcoin’s prominence in the market, you can trade it on pretty much any platform that offers crypto.
Here are some other options for buying and selling Bitcoin:
- Peer-to-peer transactions: Someone might pay you in Bitcoin for a product or service, or accept it as payment instead of cash.
- ATMs: There are more than 32,000 Bitcoin ATMs in the U.S.
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