Investing in cryptocurrency
What is bitcoin?
Bitcoin is a digital form of money, but unlike the conventional fiat currencies we are all so used to, it is not controlled by a central bank. Instead, the backbone of bitcoin's financial system is run by thousands of computers distributed all over the world. Anyone can participate in this ecosystem after installing certain open source software.
Bitcoin was the first cryptocurrency to be announced in 2008 (and launched in 2009). It provides users with the ability to send and receive digital money (bitcoins, b in lower case or BTC). But the main quality that makes this currency so attractive is that it cannot be censored, funds cannot be spent more than once, and transactions can be made at any time and from anywhere.
Why use bitcoin?
People use bitcoin for a number of reasons. Many people appreciate the first cryptocurrency for its inclusive nature, i.e. anyone with an internet connection can send and receive these coins. It is somewhat similar to cash in that no one can stop you from using it, and this digital advantage means that you can use bitcoin to exchange currency around the world.
What makes bitcoin valuable?
Bitcoin is decentralised, censor-resistant, secure and borderless.
The latter quality has made it extremely attractive for use cases such as international money transfers and payments (rimes), provided the user does not want to reveal their personal details (as in the case of using a debit or credit card).
Instead of spending their bitcoins, many people choose to store them for a long period of time (also known as hoarding). Bitcoin has been nicknamed 'digital gold' because of the limited number of coins available. Some investors see bitcoin as a means of saving. The reason for this is that it is scarce and difficult to produce, and it is also often compared to precious metals such as gold or silver.
Holders believe that the presence of these qualities, combined with its global availability and high liquidity, make it an ideal means of preserving wealth over long periods of time. They believe that bitcoin's value only continues to grow over time.
How does bitcoin work?
When Alice creates a transaction to Bob, it does not send funds in the way you would expect. It has nothing to do with the digital equivalent of handing him a dollar note. It is more like Alice writing on a piece of paper (which is available for all to see) that she is giving Bob her dollar bill. When Bob sends the same funds to Carol, she can see that Bob has the money by looking at the transactions recorded on the sheet.
transaction examples
The worksheet is a special kind of database and its name in the bitcoin system is blockchain. All the participants of the network have copies of this database stored on their devices and they are in constant contact with each other to synchronise the new information.
When a user makes a payment, they broadcast it directly to the peer-to-peer network, which is not a centralised bank or remittance processing institution. To add new information, the bitcoin blockchain uses a special mechanism called mining. It is through this process that new blocks of transactions are captured as records on the blockchain.
What is blockchain?
A blockchain is a ledger or ledger that is designed solely to add information. Once data has been written into such a ledger, it is almost impossible to change or delete it. Blockchain ensures this by having a pointer to the previous block, in every subsequent block.
The blockchain uses the hash from the previous block to produce the following block
This pointer is the so-called hash of the previous block. Hashing involves passing information through a one-way function to produce a unique fingerprint of the input data. If the input data is subjected to even the smallest of changes its fingerprint will become completely different. As the length of the chain of interconnected blocks is constantly increasing, there is no possibility for users to change the old record, because this would require invalidation status for all subsequent blocks. This structure is one of the main components that ensures the security of the blockchain network.
We recommend that you read our introduction to blockchain systems. See the article: "Blockchain Technology. A Beginner's Guide".
Is Bitcoin legal?
Bitcoin is perfectly legal in most countries of the world. However, there are a few exceptions that make it obligatory for you.