how it works?
So far, we’ve talked about what Bitcoin is for, what it’s made for, and what its features are. In the following, we will look at how bitcoin works and how the special features mentioned are implemented in this system.
Transaction data, or bitcoin transfers, is information that is stored by everyone on the network. It is better to use the word node instead of the word “participant" in the network, which means devices connected to the network, because each person can use multiple devices to connect to the network, and each of them has a separate entity. Have a network perspective.
What is Blockchain?
The distributed storage of transaction information in Bitcoin is made possible by blockchain technology. The blockchain is simply a digital notebook whose information is invariably distributed among all ninety. Blockchain is a broader concept than Bitcoin that could have other uses. If we want to show this difference very simply, we can compare the blockchain to the Internet and Bitcoin to a popular search engine like Google.
Due to the blockchain, the Nods keep track of transaction histories. When one of them wants to send some bitcoins to another, by sending their request in the form of a transaction, the nodes flip through their digital notebooks and get the sender’s inventory to make sure that the transaction is possible. The Digital Booklet of Ninety consists of sheets of paper in the blockchain known as blockchains, in which information and data are stored. If the transaction does not conflict with the rules of the network, the transaction is recognized as valid and, like the production line of a factory, waits for the next step, the transaction approval process.
How do transactions work?
After being recognized by the nodes, transactions wait in a place called a mempool to go through the verification process. To better understand how transactions work on the Bitcoin network, it is better to explain it with an example. We can assume that Mempol is a bus station whose passengers (transactions) are waiting for the bus to arrive at their destination. Bus drivers are the same miners or miners who, after entering the station, fill their buses with these passengers as much as they can. Buses also play a role in blockchain in this example.
Of course, we need to change this example a bit to show the real conditions of the network. A passenger can sit on several buses at the same time. As a bitcoin transaction can be selected by several miners and placed in their block. Passengers are currently sitting on buses waiting for drivers to begin their journey to their final destination. This destination is actually the confirmation of the transaction.
With the start of the mining or mining competition, bus drivers are trying to get their deals to their destination faster than anyone else, because the first driver to do so will receive a good reward from the Bus Company (Bitcoin Network).
After selecting the transaction and placing it in their blocks, the miners solve the block’s mathematical puzzle in a competition called extraction, which requires energy consumption and processing power. This mathematical puzzle arises from the juxtaposition of transactions and their passage through cryptographic processes called hash functions. Solving these puzzles is difficult with computer hardware and special devices called miners or ISICs. Finding the answer to these math problems will eventually lead to the approval of transactions in that block.
Once the math puzzle is found, the block, along with the other blocks that have already been solved, is arranged in chronological order, forming an interconnected chain of blocks that actually represents the concept of the blockchain .
The process of confirming a transaction by finding a mathematical puzzle is also called the Proof of Work process. But miners need an incentive to do all this, including hardware and power consumption. What motivates miners to work on the network?
Where does Bitcoin come from?
The answer to the question of who makes bitcoins is the same as what motivates miners to network. The first extractor that manages to find the block’s math puzzle on the network sooner than the rest will receive a reward equivalent to the network’s own currency, the bitcoin. This reward is provided to the miners from two main sources:
– Fee or transaction fee specified by users.
– Block Reward, which is awarded to the winning extractor after the block is resolved.
Bitcoin transactions are not free, and users have to set a certain amount of bitcoin as their fee and fee to attract the attention of miners to verify their transactions. Miners are also logically interested in choosing transactions whose fees are higher than others.
Finding the answer to the blocks will lead to the release of bitcoins on the network. It takes about 10 minutes for each block to be added to the network. On the other hand, after about 4 years, the number of bitcoins released by miners in the network also decreases. More than 18 million of Bitcoin’s 21 million units are currently mined on the network.
What factors determine its price?
As mentioned, the price of bitcoin is generally determined by the supply and demand forces. But in more detail there are a number of factors that can affect it. For example, legislation and banning bitcoin mining or trading in one of the major economies could affect its price. Development situation, developers’ decisions, important and expected events and happenings are other factors that can affect the price of Bitcoin.
Of course, the digital currency market is still volatile due to lack of maturity and in its early stages, and on the other hand, it sometimes experiences drastic changes with the supply or demand of whales. Whales are large investors with a large amount of bitcoin, and their activity in the market causes prices to fluctuate sharply, just like the movement of waves in the ocean, which creates a lot of turmoil around them.
Reasons for price increase
Some of the factors mentioned above can have a positive effect on the price of bitcoin. For example, offering more financial products such as futures contracts and ETFs can attract the attention of various large investors. Positive legislation in this area could also benefit Bitcoin. On the other hand, this digital currency is the source of the financial crisis of 2008, so any situation that leads to global economic instability can draw attention to bitcoin as a tool that has the ability to store value. Economic instability can stem from civil wars, rising and uncontrollable inflation, and geopolitical issues.
If we look at the issue from a general point of view, the factors that reduce supply and increase demand can also be considered as the reasons for price growth. The amount of bitcoin production or release on the network by miners is a variable that is out of the hands of miners and others and is written in the rules of the network. The extraction rate is a constant for every ten minutes for a 4-year period, however, the bitcoins extracted enter the exchanges and the place of purchase and sale, which can be considered as an effective supply.
That’s why when prices fall below a certain level, the cost to extractors of bitcoin increases and its sales are reduced by miners. Another reason that can increase demand and consequently increase prices is the application of bitcoin and its increasing acceptance by businesses and the public. For example, if they accept reputable businesses like Amazon or Apple Bitcoin as payment methods, this could lead to a rise in the price of this digital currency.
Reasons for price reduction
In contrast, factors that can lead to higher prices are other reasons for the fall in bitcoin prices. Announcing the ban on mining and buying and selling, along with the news of the rejection of financial products such as ETFs, are among the most important factors that could affect the price of this digital currency in the short term.
Developers can also influence the development of the network with their decisions. For example, if the decisions of one group of developers contradict each other, this could lead to their separation and lead to a so-called fork. Forks or separations usually have a long-term negative effect on the price of a digital currency.
But perhaps the most important factor in lowering prices is the fear of traders and investors, which is due to the psychological atmosphere of the market. The movement of whales and their deliberate price reductions are other reasons for removing small traders from the market.
The first data from the Bitcoin price chart dates back to mid-2010, when it was traded at a price close to one cent ($ 0.01). Since its inception, the digital currency has seen several upward and downward price cycles. Accordingly, in certain time periods, the price of bitcoin has been on the rise, which has been in the upward market, and in other periods of time, it has been in a downward and downward price, which is called the downward market.
In the first ascending cycle between 2010 and mid-2011, bitcoin rose from about a cent to $ 30, a 3,000-fold increase. The price of the digital currency fell sharply after the astronomical rise, from mid-2011 to the end of that year, when it fell 95 percent from $ 30 to $ 2.
The second uptrend was accompanied by a move from $ 2 and a 600-fold increase to $ 1,200. This upward trend began in late 2011 and continued until the end of 2013. After this sharp rise, the price fell by about 86 percent to about $ 165 and fell into a downward trajectory by the end of 2015.
Bitcoin’s third uptrend began in early 2016, pushing Bitcoin to $ 20,000 in December 2017. This growth stopped almost 100 times in 2018. Bitcoin prices are still struggling to break the previous record after more than two years of record highs.
What is the intrinsic value of Bitcoin?
Intrinsic value is more of a philosophical concept and therefore cannot be fully attributed to an asset. Critics say the digital currency, which consists of zero and one binary units, has no intrinsic value. Gold is the most famous example of an asset that has been valuable (and still is) throughout history and has been used to preserve value at various times. Of course, gold has other uses and is used in industry and jewelry.
If we consider bitcoin to have intrinsic value because of some of its properties, such as finiteness and forgery, and use it as a tool that retains value over time, its equivalent value may be compared to assets such as gold. It is estimated that in 2019, about 190,000 tons of gold were mined and 54,000 tons of underground gold remained intact. With that in mind, if the world’s total gold reserves are 244 million kilograms, if we compare the same value of its reserves with that of Bitcoin, each bitcoin should be worth 11.6 kilograms of gold. However, this valuation is not accurate and should not be used as a criterion.
How to buy bitcoin?
Bitcoin is purchased from vendor sites or directly from other people. You can buy bitcoins from sites or real people in a variety of ways, such as credit cards, online accounts, or even with other digital currencies.
To buy Bitcoin, you must go through the following process:
– Install the wallet
– Finding a reputable vendor (site or real person)
– Deposit money to the seller’s account and give the wallet address to receive Bitcoin (some sites have their own wallet)
– Bitcoin transfer
Should I Buy Bitcoin?
Just a look at the ever-rising chart of this digital currency in its multi-year history is enough to make you think that today’s Bitcoin is always more valuable than yesterday. But this is a misconception and can get you into trouble. This usually gets hot among the public and the media when bitcoin prices rise sharply. Such price increases introduce a new range of people to this phenomenon, and many of them start buying at the peak of the price. The result of such a wave of buying, as has been observed many times, has been the experience of huge losses and the loss of large sums of money.
In addition, you need to know what you are buying and be familiar with it. So your decision to buy and invest comes from the belief you have in the future of this technology. Finally, you need to know Bitcoin first, clear up any ambiguities about it, and if you believe it has the potential to become the currency of the future and achieve its goals, buy it at the right time!
Is there anything you can buy with it?
The use of bitcoin to buy goods and services is on the rise. One of the advantages of this digital currency is the possibility of purchasing for users of countries under financial sanctions such as Iran, through which users can purchase the desired service without the need for PayPal and credit cards. For example, users can now use Bitcoin to purchase Internet domains, video games, gift cards, and more.
The ability to shop with bitcoins in restaurants and shops is also expanding globally, but only a handful of these businesses in Iran have started accepting bitcoins.
One of the obstacles that has made it difficult for businesses to accept Bitcoin in various businesses is the slowness of its transactions, which customers need to wait a long time to confirm. Lightning networking is one of the solutions that can be used to make transactions faster.
How to store bitcoin?
You do not need to open an account with a particular bank or company to store or maintain Bitcoin. In this space, you are your own bank.
A wallet is a tool for storing, sending and receiving bitcoins. Users can use different types of wallets and bitcoins depending on their circumstances and needs. These include mobile wallets, desktops, web wallets, paper wallets and hardware.
Mobile, desktop, web, and paper wallets are free, and users can easily download and install them. But hardware wallets have to be bought because they are physical.
Note that transactions are not reversible and the network is not under the control of any organization. For this reason, be sure to back up your wallet and keep the recovery words in a safe place so that you can recover your money on another device if there is any problem with the device on which the wallet is installed. Also, do not give your password or private key to anyone else.
How to get Bitcoin?
Getting everything cheap for free is fun, and Bitcoin as a precious virtual object is no exception. Advertising that fills the Internet with free bitcoin and earns money with bitcoin these days is forcing you to try more and more the different ways mentioned in this article. But in a word, these things are nothing more than a waste of time and sometimes a scam!
Installing a browser that gives you bitcoins, cloud mining bitcoins, and browsing the site that you get bitcoins for by looking at its ads is all but a waste of your valuable time; sometimes even these people or sites take you to traps. They lead the way, and eventually fall victim to their scams. So pay close attention!
Can Bitcoin be hacked?
If we want to have an accurate answer to this question, there is a way for each network to penetrate. On paper, any kind of encryption can be broken, but it can be said that hacking the network and spending twice as much bitcoin, depending on the size of the network and the benefit of its extractors in proper (rather than destructive) performance, will prevent this from happening. Bitcoin’s main network has not yet been hacked, and spending twice as much has never happened before. The occurrence of this accident can somehow damage the credibility of this digital currency and cause its value to decline.
Wallets and exchanges can be hacked, and there have been several major hacks so far, but the Bitcoin network itself has not had a serious security problem. This can be compared to the Internet. Hacking a website on the Internet does not mean hacking the Internet itself.
There are several ways to hack a bitcoin network, the most important of which is a 51% attack. This attack requires powerful mining equipment so that more than 50% of the network’s processing power can be captured. Due to the vastness of the network and the high cost of double-attack, there is no incentive to do so and it can be considered almost impossible.
What is a 51% attack?
51% attack is one of the types of attacks in which the attacker takes control of more than half of the network’s power. Because bitcoin network transaction approval is the responsibility of miners, or extraction devices, controlling more than half of the power of these devices increases the likelihood that transactions will be approved and blocks will be created by one person.
If a particular individual or group can approve most transactions, they will be able to perform a double-spending attack.
The attack is carried out in such a way that the attacker transfers his digital currency in the form of a transaction in exchange for money, goods or services. The attacker then takes control of the transactions and builds the blocks, and starts building the blocks faster than the others. One of the rules of bitcoin and digital currencies is that the longest chain with the most blocks is recognized as a valid chain. If the attacker is able to build this chain earlier than the others and does not put his first transaction in the blocks, he will be able to spend twice as much or attack 51%.
Are Quantum Computers a Threat?
Quantum computers are considered one of the biggest threats to digital currencies and the Chinese blockchain, but how serious is this threat?
Quantum computers, due to their different structures, are able to process much more operations than today’s computers. Bitcoin encryption is such that it is impossible to obtain a private key (which has the same password as a wallet account) by guessing. But quantum computers can be a threat to cryptographic-based technologies because of their high processing power.
Many sensitive and top-secret information, such as the position of submarines carrying nuclear missiles, etc., are encrypted for their own security. That’s why bitcoin is probably the last option that quantum computers would go to if they wanted to. However, bitcoin encryption is such that the current power of quantum computers is far from breaking.
What will the future hold for Bitcoin?
It is believed that bitcoin will be used in the future as a currency against which our paper banknotes today seem ridiculous, or as a technology that made a fuss in its time and then was forgotten. People depend on bitcoin. Acceptance of this digital currency has been growing since the beginning of its history, and the continuation of this path seems to be the most likely option. Using bitcoin as a tool that can store value over time, along with using it as a medium of payment or increasing money, but in addition to all this, bitcoin also has problems that can be accepted quickly. Reduce it and, at worst, prevent it from spreading.
What are the problems with this currency?
One of the most important problems facing Bitcoin is the difficulty of understanding it and presenting completely new concepts that exist in various fields of computer science, economics, game theory, and several other areas. So if you are new to this field, I would like to say that it is a difficult but pleasant path for you!
Bitcoin transactions are slow compared to bank transactions and the daily payments you make. The average ten-minute time you have to wait for transactions to be confirmed, while increasing system security, has reduced convenience. Of course, there are solutions for this problem, such as Lightning, which can be used to make instant transactions with Bitcoin.
Because Bitcoin is a new phenomenon, it has faced numerous legislative problems in various countries. Some countries, such as Japan, have moved to legislate and accept it as a currency, and a number of other countries have banned the sale and use of it. In addition, many more countries have not yet taken a clear position on digital currencies.
Bitcoin fees and transaction costs are often high enough to make it difficult to use in micro payments. Of course, there is the same solution for this issue, which is to use the Lightning network.
Is Bitcoin legal?
So far, many governments, including Iran, have not taken a clear position on Bitcoin, but that does not mean that digital money is illegal and that using or buying and selling it is a crime. In several countries, such as the United States, South Korea, Japan, Hong Kong, Malta, and Malaysia, exchanges are operating legally.
Some jurisdictions, such as China, do not legalize digital currencies, but they can be used by the general public. However, due to the growth of exchanges, mining industry and related businesses, it is likely that comprehensive laws will be enacted in the future.
Bitcoin, on the other hand, is a kind of money. Money that has a variable value and, like other commodities, can be used for criminal activities such as money laundering or the sale and purchase of illegal goods. However, it is not impossible to track the crimes committed with Bitcoin. One successful example of bitcoin legislation is Japan. The government has been able to prevent money laundering and fraud to a large extent by registering exchanges and sending financial directives to them.
Can governments ban it?
Bitcoin has entered the fray by targeting banks and financial intermediaries, the biggest supporter of which is the government. Governments can prevent the use of bitcoin in their countries by obstructing it at various stages of its extraction or buying and selling, but in spite of all this, it is not possible to fully resist this phenomenon.
Transactions that take place within a network are beyond the control of any organization or government. If the use of bitcoin becomes practical and you no longer need to convert your bitcoin into cash to buy, then it will no longer make sense to stop using bitcoin and ban it. Under these circumstances, governments will only be able to do their utmost to monitor and control transactions between individuals. Even governments that ban mining in their home country, and if mining is profitable, mining devices on a smaller scale will remain lit in the basement.
Is it possible to destroy Bitcoin?
The media has reported the death of Bitcoin more than hundreds of times. Disappearance can be misleading. If destruction means that no trace of it can be seen, then it is impossible to say. Bitcoin will survive as long as only one person remains on its network and continues to mine.
To completely eradicate bitcoin, all Internet and electricity communications must be shut down globally, which seems like an unlikely apocalypse. Of course, even if a temporary shutdown occurs on the entire Internet, Bitcoin will resume its work after reconnecting the nodes.
Another scenario for the death of this digital currency is the possibility of a major bug in one of its updates, which is very unlikely to happen. Because so many developers and developers are free to view the code and updates, all bitcoin software updates are done conservatively and after several tests.
Even if governments work together to close related businesses, they will move to regions and countries that love digital currencies. The existence of a digital currency that is better than Bitcoin and can overcome the brand that Bitcoin has achieved today is another possibility that could weaken Bitcoin over time.
Bitcoin has shown that it is resistant to hacking of exchanges, wallets, software and services that have formed on its platform, and only accepts short-term price effects from them. But a 51 percent attack on the network could jeopardize its credibility and drastically reduce its price. However, the cost of carrying out such an attack is unimaginable, and miners are logically not motivated to destroy their own economic activity.
Is Bitcoin a Bubble?
The tulip flower bubble was formed about 400 years ago by the madness that led to the purchase of tulips in the Netherlands. During this bubble, the price of tulips increased up to 200 times, but eventually due to the short life of the flowers, the small use and of course its abundance after a short period, the bubble burst.
The .com bubble was formed in the early 21st century when the Internet became the biggest phenomenon of its time. Many newly established companies entered the stock market, and with the investment of the people in them, the value of companies whose only product was a simple site increased to millions of dollars. Many companies went bankrupt after the bubble burst, but others survived, such as Amazon and Google, and a few decades later became tech giants.
Bitcoin cannot be compared to tulip bubbles because it is much more durable and its number is actually limited, and on the other hand, its use is increasing day by day. But the dot-com bubble that has led to the creation of so many useless and useless companies can also be seen in the world of digital currencies. There are many quinces and tokens that have no use, and most likely many of them will have no place in the future.
What is Hawking or halving the extraction bonus?
In order for miners to be active in the network and approve transactions, there must be an incentive and economic incentive for them. In the Bitcoin network, transaction fees and block bonuses encourage miners.
The first blocks rewarded 50 bitcoins for miners, and after 210,000 blocks, that number halved to 25. This process, known as Hawking or halving the extraction bonus, occurs over a period of about 4 years and halves the reward of blocks each time.
At present, the extraction bonus is 12.5 bitcoins, and next year (2020) this amount will be reduced to 6.25 units.
The halving of Hawking’s reward is important because it reduces supply and inflation, which is a strong factor in raising its price. The event also has a huge impact on the profitability of mining, thereby increasing the cost of living and expenses.
What will happen after all the bitcoins are extracted?
Taking into account Hawing’s four-year terms, all bitcoins will be mined in 2140, after which no bitcoins will remain to be mined. So what motivates miners should have for networking and why should they continue to mine?
In addition to the extraction bonus, the miners’ source of income is transaction fees. Mining rewards will be severely reduced after the next 20 to 30 years and after a few more hawks, and their value will be negligible compared to transaction fees. With this in mind, before the year 2140 arrives, the profitability of bitcoin mining will come from transaction fees. After extracting all the bitcoins, the miners will continue to operate on the network as transaction verifiers.
Published and authored by FalconProfit.com