Details

Going into detail about the history of what Bitcoin is and where we have taken it so far. Guiding you on different ways that you will be using and navigating it.

Understanding Bitcoin

Bitcoins Blockchain Technology - Cryptocurrencies are part of a blockchain, a blockchain is basically a distributed ledger. It is a shared database that shares data.

When a transaction takes place on the blockchain the information from the previous block is copied to a new block with the new data, which is encrypted and then the transaction is verified by validators which are called miners. All the data within the blockchain are secured by various encryption methods. Once a transaction is verified a new block is then opened, and a bitcoin is created as a reward to the miner/miners who were responsible for the verification of the data within the block. They can then do what they wish with the gifted Bitcoin.

Bitcoin uses what is called a SHA-256 hashing algorithm to encrypt the data stored in the block on the blockchain. Which means that the transaction data that is stored on the block is encrypted with a 256-bit hexadecimal number. hat number then contains all of the transaction data and information that was linked to the blocks before that particular block.

The transaction are placed into a queue where they wait to be validated by miners within the network. Miners that are in the Bitcoin blockchain network all attempt to verify the same transaction at the same time, while the mining hardware and software are working to solve the nonce, a four-byte number included in the block header that the miners are attempting to solve. The block header is then hashed or randomly regenerated by a miner over and over until it meets the target number that has been specified by the blockchain. The block header is 'solved' and then the new block is created for more transactions to be encrypted and then verified.

Mining Bitcoin

A different number of hardware and software can be used when mining bitcoin. At the beginning of bitcoins release it was possible to mine it competitively on a personal computer. But as it has become more popular, more miners joined the network, which in turn lowers the chances of being the one to solve the hash. If you have newly updated hardware, you can still use your personal computer for mining but the chances of you solving the hash individually are quite slim.

The reason for this is because you are essentially competing with a whole network of miners that generate around 220 quintillion hashes (220 exa hashes) per second. Plus there are now machines called Application Specific Integrated Circuits (ASIC), which have been specifically built for mining. It is able to generate about 255 trillion hashes per second. In comparison, a computer with the latest hardware hashes about 100 mega hashes per second (100 million).

In order to become a successful bitcoin miner, you have a number of options. You could use your personal computer with mining software that is compatible with bitcoin and then join a mining pool. Which are just groups of miners that combine their computational power to have a chance to compete against the larger ASIC mining farms that we explained earlier in this section of the Lexicon.

Joining a pool will greatly enhance your chance of being rewarded, but since you are in a pool the rewards are decreased significantly because they are shared.

There is also another option but that is only if have the funds available, you could purchase a ASIC miner for yourself. If you are looking then you will be most likely spending at least $20,000 but there are also used ones being sold by miners, as they upgrade systems. There are also other factors to consider when thinking about purchasing, for example electricity and cooling.

You will have a wide number of programs and pools to choose from when it comes to mining bitcoin. Two of the most well known and used programs are CGMiner and BFGMiner. There are a couple of important things to consider when looking for a pool to join:

  • Check the mining pool reviews

  • Check how they pay out rewards

  • What fees they have, if any

Buying Bitcoin

For those who are not wanting to mine Bitcoin for themselves it can always be bought using a cryptocurrency exchange. But because of the price most people won't be able to buy a single Bitcoin, but you are able to buy fractions of a Bitcoin using these exchanges in fiat currency like U.S. dollars. For example you could buy Bitcoin on Coinbase by creating an account and then just funding that account. You can fund this account using your bank account, credit card or debit card.

The original purpose of Bitcoin is to have a peer-to-peer payment method that was for everyone. But over the years it is adapting due to it's increasing value and also competition from other blockchains and cryptocurrencies.

In order for you to use your Bitcoin you will need to have a cryptocurrency wallet, these wallets hold your private keys to the Bitcoin that you have. They then need to be entered when you are doing the transaction. Today Bitcoin is accepted as a form of payment for different goods and services at a number of merchants, retailers and stores.

The transactions can be handled with the requisite hardware terminal or wallet address through QR codes and touchscreen apps. Online businesses are easily accept Bitcoin by adding this payment option to it's other online payment options like credit cards, PayPal and others.

Investing in Bitcoin

Once the popularity of Bitcoin started to grow that is when investors really became interested in Bitcoin. During 2009-2017 more and more cryptocurrency exchanges began appearing which facilitated Bitcoin sales and purchases. As the prices began to rise and the demand started to grow as well until 2017, when it's price broke $1000. At which point lots of people started buying Bitcoin and holding it, believing that the price would just continue to climb. Then traders came along and began using cryptocurrency exchanges to make short-term trades which made the market take off.

Risks when investing with Bitcoin

Just like any type of investing there are a number of risks and factors that you must consider before making any big decisions. Since the explosion of popularity in Bitcoin investors have begun to try and take advantage, on Dec.11, 2019 Bitcoin had a price of $7,167.52 and a year later it was up 300% to $28,984.98 and continued to climb into the first half of 2021. Trading at a record high of over $69,000 in November 2021, then eventually falling and staying around $40,000.

With the all time high being $69,000 that was reached on November. 9, 2021.

Because of this, many people simply purchase Bitcoin solely for investment purposes rather than it's ability to act as a medium of exchange. This being said, with the lack of guaranteed value and also it's digital nature means that it's purchase and it's actual use comes with a number of inherent risks. For example, many investor alerts have been issued by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and also the Consumer Financial Protection Bureau (CFPB) regarding Bitcoin investing.

Regulatory Risk - With a lack of uniform regulations on Bitcoin and also other cryptocurrencies, raises questions about their longevity, liquidity and compatibility.

Security Risk - For most of the people who own and use Bitcoin do not acquire it by mining. For the most part users just buy and sell Cryptocurrencies on popular online markets that are called Cryptocurrency exchanges. Because these exchanges are all digital and just like any virtual system they are at risk of hackers, malware and operational glitches as well.

Insurance Risk - Bitcoin and other cryptocurrencies are not insured through Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC), some exchanges provide insurance through third parties.

Freud Risk - Even with all the security measures that are already within the blockchain, there are still ways for people to find opportunities for fraudulent behaviour. That being said you must do your best to always try to stay vigilant and double check everything.

Market Risk - Just like with any investment, Bitcoin values can fluctuate. Just like we have seen in the past the value of the currency has been pretty wild during it's short period. Subject to high volume buying and selling on the exchanges, and is highly sensitive to any newsworthy events.

Last updated