What is Bitcoin (BTC) and why is it important?

In a world where technology is reshaping the way we live, work, and invest, one name stands out as the pioneer in the crypto industry – Bitcoin. Represented by the ticker BTC, bitcoin is the leading cryptocurrency by market capitalization, value and adoption rate. 

Introduced in 2008 by an anonymous individual or group of individuals using the alias Satoshi Nakamoto, bitcoin has greatly revolutionized the financial landscape by introducing a decentralized and peer-to-peer (p2p) electronic cash system.

Since its inception, it has received both credit and criticism. While crypto enthusiasts herald BTC for challenging the concepts of fiat currencies, presenting an alternative means of payment and investment, critics ignorantly bash bitcoin principally for its volatility. 

Nonetheless, BTC has continued to gain huge adoption from individuals, institutions and governments, clinching an all-time high of $69,000 in 2021. Therefore, whether you are new to bitcoin or yet to fully grasp how it works, this article will help you decode everything about BTC. 

What is Bitcoin (BTC)? 

Bitcoin is a form of digital currency that operates on a technology called blockchain. According to Satoshi Nakamoto, it is a “purely peer-to-peer version of electronic cash [that allows] online payments to be sent directly from one party to another without going through a financial institution.”

In other words, bitcoin is a decentralized cryptocurrency that operates on a peer-to-peer network, allowing users to send and receive payments directly without the need for intermediaries such as banks or governments. 

Unlike traditional fiat currencies — such as the Naira (NGN) and US dollar (USD) — issued by respective central banks, bitcoin is not controlled by any government or financial institution. Instead, it relies on cryptographic algorithms to secure transactions and control the creation of new units.

Thus, one of the key features that sets BTC apart from traditional currencies is its decentralized nature. Another is the cryptoasset’s limited supply. The total number of bitcoins that can ever exist is capped at 21 million, making it a deflationary asset. Meanwhile, fiat currencies are inflationary assets given they have unlimited supplies. 

Also, BTC has gained wide adoption due to its ease of usage, fast transaction speed and lower charges compared to traditional banking systems. 

Further, bitcoin’s emergence has facilitated innovative financial services such as decentralized finance (DeFi). DeFi platforms leverage smart contracts to offer lending, borrowing and trading services without relying on traditional intermediaries. This opens up new opportunities for individuals who may have limited access to traditional banking systems.

How does Bitcoin work?

As mentioned, bitcoin —and every other cryptocurrency— operates using blockchain technology. Notably, a blockchain is a decentralized public ledger where data (transactions) stored cannot be erased or altered. 

Specifically, the Bitcoin network functions using the concept of proof of work (PoW), a blockchain consensus algorithm that requires miners to use supercomputers to solve complex mathematical puzzles. 

This process dubbed crypto mining helps to secure and validate transactions on the Bitcoin network. More so, mining is the only means through which BTC are created or brought into circulation.

Practically, bitcoin transactions are processed on a decentralized network of computers, known as nodes. Each node on the network has a copy of the entire Bitcoin blockchain. 

When a BTC transaction is initiated by a user, it is broadcast to the network. Miners on the network compete to solve complex mathematical puzzles to add the transaction to the blockchain. Notably, transactions are grouped into blocks. 

The first miner to solve the puzzle or find the specific value called nonce then broadcasts the solution to the network for verification. Other nodes in the network verify that the solution is correct.

If correct, the transaction is completed and a new block is added to the blockchain. The miner is then rewarded with newly created bitcoins (block reward) and transaction fees.

What are the use cases of BTC?

One of the primary use cases of bitcoin is as a digital currency. It enables individuals to make peer-to-peer transactions without the need for intermediaries such as banks. 

This allows for faster and cheaper cross-border transactions, making it an attractive option for international remittances. Likewise, several businesses and universities around the world have adopted BTC as a payment method. 

Bitcoin also serves as a store of value and an investment asset. Being a volatile asset, market participants can speculate on the price of bitcoin to make profits. Overall, the use cases of Bitcoin extend beyond just being a cryptocurrency. 

Related: What is Crypto Trading? 4 Types You Can Engage In To Make Money

What are the pros and cons of Bitcoin? 

Pros

On the one hand, bitcoin offers several benefits and opportunities to users. First, it operates on a decentralized network, which means that transactions can be conducted directly between users without the need for intermediaries such as banks. This enhances privacy and reduces transaction fees. This decentralization factor also makes bitcoin resistant to censorship and government interference.

Second, BTC transactions are typically faster compared to traditional banking systems. Further, bitcoin provides individuals with greater control over their finances. BTC users have full ownership of their funds —especially if stored in crypto wallets— and can access them at any time without restrictions or limitations imposed by financial institutions. 

In addition, BTC serves as a hedge against inflation given it’s a deflationary asset.

Cons

On the other hand, there are also drawbacks to consider when it comes to bitcoin. One notable concern is its volatility. The value of BTC can fluctuate greatly within short periods, making it a risky investment option for some individuals.

Moreover, the scalability of Bitcoin has been a subject of debate within the crypto community. As more users join the network and conduct transactions, there may be challenges in maintaining fast transaction processing times and low fees.

Therefore, while Bitcoin offers advantages such as decentralization and greater financial control for users, it is important to be aware of its volatility and potential risks associated with scalability. 

Read Also: Crypto Fear and Greed Index: What It Means and How To Leverage It

Bottomline

Bitcoin is a groundbreaking digital currency that operates independently from traditional financial systems. While its decentralized and deflationary nature has positioned it as an investment asset, means of payment and store of value, BTC can be highly volatile due to factors such as investor sentiment, demand and the cryptocurrency market cycle. Understanding these pros and cons can guide one’s involvement with the leading cryptocurrency.

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