A Beginners’ Guide to Bitcoin: How Bitcoin Works, Bitcoin History, Factors Driving Bitcoin Price

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Recently, the bitcoin price has been the talk of the town. Everybody is insanely following the news related to bitcoin but very few of us know about what is bitcoin & how does it work, its origin, history, and what drives bitcoin price.

Do you know- not only is bitcoin the first cryptocurrency, but it’s also the best-known of more than 7,000 virtual currencies existing today? Besides, if there's any crypto with the highest value, it's Bitcoin Price.

At the beginning of this year, the bitcoin price hit an all-time high of around $65,000 (roughly 47.3 lakh) in April 2021. However, with the recent bitcoin price fall, the world of cryptocurrencies has been taken by a storm.

At the time of writing this blog, the bitcoin price stands at Rs. 33,70,402.37 (i.e 46,413.20 US dollar).

I assume; most of us are quite familiar with Bitcoin and its pricing and current market scenario. But something that many of you still don’t follow is what is bitcoin & how does it work or what factors influence the price of bitcoins. You may have a little idea but that isn't enough. Hence, before you invest in bitcoins, you must have an understanding of the same.

Therefore, in this blog, we have covered mostly the fundamentals of bitcoins. Here are the highlights:

  • The Market Overview
  • History of Bitcoin- Journey of the World’s Oldest Crypto
    • The Creation & the Creator of Bitcoin
    • Important Events Related to Bitcoin
  • What is bitcoin and how does it work?
    • Uses of bitcoins
  • Factors Determining Bitcoin’s Price
  • How Can You Acquire Bitcoins?
  • Is Bitcoin Regulated by Any Special Authority? If So, Who Regulates Bitcoin?
  • How to Buy Bitcoins in India?
  • Types of Risks Associated With Bitcoin Investing
  • Some Interesting Facts about Bitcoin You Must Know

The Market Overview

As explained earlier, bitcoin hit an all-time high of around $65,000 in April 2021. But just after a month, the entire crypto market crashed badly and so does bitcoin. It went down to $34.755K and the lowest of this year to $29.79K.

This downfall was the reason for China’s ban on crypto mining and trading. According to sources, China mines more than half of the bitcoins than anybody in the world.

Let’s have a look at the Bitcoin price chart provided by Blockchain.com as of August 13, 2021.

Picture1

It’s pretty apparent from the above graph that this year has been a total roller-coaster ride not only for bitcoin but the entire crypto market.

As of August 13, 2021, the BTC rate stands at $46,413.20. As you can see, once again the graph has started moving in the upward direction and it is expected that it will soon reach its highest value again or maybe by the end of the year.

History of Bitcoin- Journey of the World’s Oldest Crypto

The journey of Bitcoin from its creation to mining and its current market value is pretty fascinating. So, instead of taking a plunge into the dates directly, we will have a glance at its creation first.

The Creation & the Creator of Bitcoin

Are you aware of the fact that although bitcoin was first introduced in 2009, the idea of cryptocurrency originated a decade ago?

Bewildered?

Well, it’s true. Wei Dai brought the notion of cryptocurrency in the year 1998 on the cypherpunks mailing list. He proposed to the world the new form of money that can employ cryptography to control its creations and transactions, instead of being controlled by the central authority.

Just a decade later i.e in the year 2009, the world’s first crypto finally came into existence.

Satoshi Nakamoto, a pseudonymous person or a group of people, published a white paper of 9-page on the mailing list. This white paper consisted of the first-ever mention of bitcoin. Nakamoto named this digital coin a “peer-to-peer electronic cash system.”

Then, in January 2009, 1st Bitcoin was mined knows as “Block 0”. Nakamoto released the first bitcoin software and partnered with developers and coders online to improve it.

This collaboration continue until 2011 when Nakamoto vanished without any warning. However, he or they did email a fellow developer mentioning that they had “moved on to other things” before they cut off all the communication.

Important Events Related to Bitcoins: from Creation to Mining the Block O

Even though the first bitcoin was mined in 2009, the idea of bitcoin came to light in 2008.

Satoshi Nakamoto registered a domain name bitcoin.org on August 18, 2018, and later that year, he authored a paper named “Bitcoin: A Peer-to-Peer Electronic Cash System” on 31st October 2018. He posted that paper on the cryptography mailing list.

And from there on, Bitcoin kept taking steps towards success and today’s not only is it the first crypto ever created in the world, but it is also the costliest crypto in the world.

Let’s have a look at the journey of Bitcoin since its inception:

Dates Important Events Related to Bitcoins
18th August 2008The domain name bitcoin.org was registered
31st October 2008A group or person named “Satoshi Nakamoto” announced that he/they have been working on a fully peer-to-peer system, a new electronic cash system, with no trusted third party. The announcement was made on metzdowd.com.
3rd January 2009The first Bitcoin block, Block 0, was mined. This block is also referred to as the “genesis block”.
8th January 2009The first version of the bitcoin software was announced on the Cryptography Mailing List.
9th January 2009Block 1 was mined, and bitcoin mining commenced in earnest.

Understanding Bitcoin: What is Bitcoin & How Does It Work?

Bitcoin is a crypto or digital currency created in 2009. It’s a consensus network that allows a new payment system and entirely virtual currency.

It is the first decentralized peer-to-peer payment network regulated and controlled by its users having no middlemen or central authority- meaning, no banks.

If you look from a user’s perspective, bitcoin is more like cash for the internet. It can also be considered the most prominent triple entry bookkeeping system in existence.

You can buy or sell bitcoins on crypto exchanges using different currencies.

Let us now understand how bitcoins work.

Basically, each bitcoin is a computer file stored in a ‘digital wallet’ app on a computer or smartphone. You can send bitcoins (or part of them) to other people, and people can send them to you.

Every bitcoin transaction is registered on a public list called “the blockchain”. Blockchain helps in tracing bitcoin’s history so that people can be stopped from spending coins they don’t own. Besides, it will also make copies or undo invalid transactions.

Now that you know what is bitcoin & how does it work, you should know how to use it.

Uses of Bitcoins

Bitcoins could be used for various purposes such as trading, gaming, and more. Have a look at the image below to get an idea about how you can use this virtual crypto:

Uses of Bitcoin

Now that you know what is bitcoin and what it is used for, let us now find out what determines Bitcoin’s price.

Factors Determining the Bitcoin Price

In contrast to investing in traditional currencies, bitcoins aren’t backed by a government or issued by a central government.

Purchasing bitcoins is different from buying stocks or bonds as bitcoin isn’t a corporation. Hence, there aren’t any corporate balance sheets to review.

Now, since bitcoin isn’t issued or backed by a government, the inflation rates, monetary policy, and economic growth measurements that typically affect the currency’s price, don’t apply to bitcoin price.

So, the bitcoin price is determined by the following factors as defined in the infographics given below:

Factors affecting the price of bitcoin

How Can You Acquire Bitcoins?

You can acquire bitcoins through the following:

How to Get Bitcoins?

It could be possible to find people who want to sell bitcoins in exchange for a credit card or PayPal payment.

However, most exchanges don’t allow funding via such payment modes. The reason for the same is the chargeback where someone purchases bitcoins with PayPal and then reverses their half of the transaction.

Is Bitcoin Regulated by Any Special Authority? If So, Who Regulates Bitcoin?

As discussed earlier, one cannot modify or change the bitcoin protocol without the cooperation of its users, who decide what software they use.

In global bitcoin network rules, it’s quite a non-practical approach trying to assign special rights to a local authority.

However, there’s a possibility that any rich organization may choose to invest in mining hardware so that it can control half of the computing power of the network and be capable of blocking or reversing recent transactions.

But one can’t guarantee that they could retain this power as it demands investment as much as from all other miners in the world.

However, it’s possible to regulate the use of bitcoin just like any other instrument. Similar to the dollar, you can use bitcoin for a wide range of purposes. As per jurisdiction’s law, some of them could be legitimate while others couldn’t be.

If we compare, bitcoin isn’t any different from any other resource or tool. It can be subjected to various regulations in each country.

Some restrictive regulations can make the use of bitcoins quite difficult. In such cases, it’s hard to estimate the percentage of users using this technology.

If a government chooses to ban bitcoin, it would restrict domestic businesses and markets from developing, shifting innovation to other countries.

As always, the challenge for regulators is to build efficient solutions while not affecting the growth of new emerging markets and businesses.

How to Buy Bitcoins in India?

At the time of writing this blog, the bitcoin price in India stands at Rs 35,32,165.15. Not many can think of buying a complete bitcoin as a whole. However, you can surely purchase it in parts.

A number of crypto exchanges in existence today has made the buying and selling of cryptocurrencies fairly easy for the layman. So, if you are planning to invest in Bitcoin and yet not sure how to do it, then follow the steps described below:

Step 1: Firstly, download and install the most trusted crypto exchange app such as WazirX, Coinswitch Kuber, Bitbns, CoinDCX, etc. on your phone.

However, before you settle for that, ensure that you have selected your exchange only after thorough research on the same.

Step 2: Secondly, you must create and set up an account on that exchange by registering and verifying your KYC. Also, do set up two-factor authentication to make your app super secure and protected from any fraudulent activity.

Step 3: Next you need to update your UPI or bank details in your account. Once it is registered, you can add money to the exchange.

Step 4: After depositing the money into the exchange, you can start buying Bitcoins using the money, or any other cryptocurrency that is available for purchase. But make sure you are ready to invest and are prepared to handle all the ups and downs of the market.

Types of Risks Associated With Bitcoin Investing

The current price swing of Bitcoin is itself a big piece of evidence of how volatile the currency is. It’s good that you have the potential to adapt to the volatility of the market but there are a lot of other things such as various risks associated with bitcoin investing that you should consider before investing.

They are as follows:

  1. Price Volatility Risk: Bitcoin price is quite prone to wild swings and you have witnessed that in the past few months. Right? The crypto market is being Fomo Frenzy which makes it quite sensitive. As a result, there’s volatile and frequent upswings and downdrafts in the crypto’s price.
  2. The Risk of Private Keys or Password Loss: You or any bitcoin user need a specific numerical code to access Bitcoin called private keys. In case you lose the key, you won’t be able to access your bitcoin.
  3. Regulatory Risk: Various countries are coming up with their own set of regulations for cryptocurrencies. With increased regulations, bitcoins or any cryptos are going to face several implications for their future use.
  4. Cyber Security Risk: Anything that is on the internet is always exposed to the risk of getting hacked. Hackers from all over the world have caused millions of dollars worth of losses in stolen virtual tokens, including Bitcoin.
  5. Bitcoin is not money: Since bitcoins are tradeable assets, and nobody backs them. It possesses value only because people who are trading Bitcoins say that they have value. No government or authority is helping Bitcoin regain its value.

Besides the above-mentioned, there are a few other risks also such as the loss of demand risk, etc.

Such risks obviously will make you question a lot before investing in Bitcoin. But don’t let these cloud your judgement, just ensure that you are moving ahead with the right strategies.

Some Interesting Facts about Bitcoin that You Must Know

Well, enough of the talking and theories on Bitcoin, let’s unbox some fascinating facts about this cryptocurrency:

  • The first purchase made using Bitcoin was for two Pizzas on 22nd May 2010 at Papa John’s Pizzas by Laszlo Hanyecz.
  • A person exchanged two pizzas for 10,000 bitcoins. Yes, you heard it right. You can imagine its worth today. Right?
  • Every year, the world celebrates May 22 as Bitcoin Pizza Day.
  • The inventor of Bitcoin, Satoshi Nakamoto is still unknown and a big mystery to everybody.
  • Satoshi Nakamoto holds the largest number of Bitcoins in the world i.e. over 1 million.
  • If by any chance you lose your bitcoin private, you lose all your BTCs. So, keep it safe.
  • The supply of bitcoin is finite and now we can mine only 21 million bitcoins.
  • 3 to 4 million bitcoins have been lost forever and can’t be extracted or retraced ever.
  • There are absolutely no charges on receiving bitcoins.
  • Bitcoin is untraceable, yet not untraceable- meaning if somebody has your bitcoin public address, he or she can easily find out the number of bitcoins you possess and what transactions you have made.
  • It’s the oldest cryptocurrency in the world.

Key Takeaways

From the above discussion, we can conclude the following:

  • Unlike purchasing stock that grants you ownership in a company, buying bitcoins grants you ownership of that digital currency.
  • Bitcoins are neither regulated nor issued by the central government. Therefore, they aren’t subject to governmental monetary policies.
  • Bitcoin prices primarily depend on its supply, availability, market demand, and competing cryptocurrencies.

With this, we would like to put a halt here and assume you enjoyed learning the fundamentals such as what is bitcoin & how does it work? We assume that you are well aware of its origin and more.

But hey, you know what? Knowledge is never enough. Hence, reading just one blog can never be sufficient to have a strong grip on a specific topic.

So, we suggest, read our other blogs on bitcoins such as bitcoin price history, bitcoin mining, and other virtual currencies. It will help you have a great understanding of how cryptocurrency and the crypto market actually work.

If you liked this blog, then do share it with your friends and family. Let us together make India financially aware!

Frequently Asked Questions (FAQ)

How do bitcoins work?

Basically, each bitcoin is a computer file cached in a "digital wallet" app on a smartphone or laptop or whatever system you use or work on. You can send bitcoins (or part of them) to other people, and people can send them to you.
Every bitcoin transaction is registered on a public list called “the blockchain”. Blockchain helps in tracing bitcoin’s history so that people can be stopped from spending coins they don’t own. Besides, it will also make copies or undo invalid transactions.

How do you get Bitcoin?

There are various ways you can obtain bitcoin through bitcoins mining, receive it as a reward, or you can simply buy it, and more.

Where do bitcoins come from?

Bitcoins are extracted through the process called bitcoin mining i.e. adding transactions to a public ledger.

Can a bitcoin crash?

Of course, it can crash and has, in fact, crashed many times. However, it always goes up after some time. Since the crypto market is quite volatile, you don’t know when the cryptos will take a dip.

How many bitcoins are left?

2,508,012.0 bitcoins are left in total to be mined.

How long would it take to mine 1 Bitcoin?

Currently, there’s no way to mine just 1 bitcoin. Rather, crypto miners have to mine one complete block which is 6.25 BTC per block. Each block takes 10 minutes to mine.

How do I start mining bitcoins?

If you want to start mining bitcoins, then you must own a mining rig- software that is specifically designed for mining bitcoins and other currencies based on the same algorithm. It is known as ASIC (Application-Specific Integrated Circuit chips) which uses less energy and mines bitcoin much faster. However, the software is very expensive.

Who has the most Bitcoin?

If the true identity of Satoshi Nakamoto is revealed, he will be considered the person with the most number of bitcoins. Satoshi holds more than 1 Million bitcoins worth $34,937,100,000. The next in the line is the Winklevoss brothers holding 91,666 bitcoins.