Many refer to Bitcoin as the new age Gold. Read about Bitcoin and the characteristics of Bitcoin here.
Table of Contents
- How Bitcoin works 1
- Bitcoin as a store of value 2
- A network of payments 2
- What is bitcoin mining? 2
- How to mine bitcoin 2
- How to prevent Double Spend? 3
- Risks that come with bitcoin mining 3
- Profitability 3
- Price volatility 3
- Regulation 4
- Tax on Bitcoin mining 4
- Advantages of bitcoin mining 4
- What Is halving? 4
- The new gold rush 5
- Key takeaway 5
When people realized that paper money would one day become an outdated form of payment, they looked towards a newer, more innovative form of currency, and thus, cryptocurrency was born. A cryptocurrency is a digital form of money that people can use to trade services or goods. A variety of companies have created their digital currencies, often known as tokens which a person can use as a digital form of payment.
Currently, the most famous cryptocurrency is Bitcoin; it is also the first digital currency created and mined by millions of people. Bitcoin was invented by an anonymous cryptographer know by the alias Satoshi Nakamoto. Bitcoin was created in 2008 with promises of becoming a universal electronic currency to be used globally.
How Bitcoin works
Bitcoin has a decentralized system; anyone can participate in it, but no one can own it. Blockchain is the underlying software that bitcoin runs and works on to create a successful chain of finished and approved transactions. In other words, it is a digital ledger of duplicated transactions scattered across computers( or nodes) on the bitcoin network. Nodes contain the whole or partial history of transactions conducted on the web.
Nodes are responsible for accepting or denying transactions by conducting a series of checks to ascertain that proper validation parameters are observed. If the transaction is valid, it will be accepted and appended to the blockchain, after which it is spread across other nodes. A blockchain is an anonymous account of transactions, available for anyone to see, but the transacting parties remain anonymous.
When more computers join the blockchain, the security and stability of its network increases. Anyone with a laptop that fits the required capabilities can partake in the blockchain, but not everyone is a miner. Bitcoin possesses the qualities that make it more than just a coin; it is also a network of payments and a store of value.
Bitcoin as a store of value
It's surprising how much interest bitcoin has gained from big corporations, including Wall Street. In 2010 through an open forum called bitcointalk.org, one developer purchased pizzas using Bitcoins as a form of payment. When it started, its value was $0; through the years, its value has steadily increased until now, it's worth $47,742.10.
A network of payments
Bitcoin's underlying software entails a digital ledger containing transactions on its network. The algorithm is programmed to create scarcity in mining bitcoins which, in turn, increases the value of bitcoin. By successfully solving complex mathematical equations, it triggers the generation of Bitcoins. This process is what is called mining, whereby bitcoin miners are rewarded with a digital token.
What is bitcoin mining?
This is the activity whereby people use their computers to partake in the Bitcoin blockchain network serving as transaction processors and validators. Miners have to prove their involvement in the blockchain using a system known as proof of work to earn a reward.
Mining bitcoin requires electronic energy to solve mathematical equations to complete existing blocks and form a blockchain. The necessary digital power is almost equal to the physical effort applied when mining minerals. That is why it was called mining!
How to mine bitcoin
First, mining from home is not a feasible enterprise. This means big players with enough capital and equipment are more likely to benefit. However, other mining options can issue a passive if not a whole month's income. Profitability depends on the value of BTC coins, mining equipment, and electricity costs.
Mining bitcoins requires some very powerful computers like HUI YOU Professional Bitcoin Miner. Unlike before, mining bitcoin on an individual home computer simply does not work anymore. The processing power required to solve mathematical equations is too heavy for ordinary home computers. However, there are some other cryptocurrencies people can try that support a home PC's processing power.
To mine bitcoins, a GPU (Graphics Processing Unit ) or (Application-specific integrated circuit ) ASIC is essential to enable the set up of a mining rig.
How to prevent Double Spend?
Miners are like auditors since miners earn rewards by verifying the validity of Bitcoin transactions. When miners verify transactions, they prevent double-spending issues. Double spending is where Bitcoin owners illicitly trade the same bitcoin twice. This is not possible with paper money since once you hand out a bill to purchase a service or product, it's no longer in your possession. When it comes to digital currencies, there is the risk of a holder duplicating the digital token.
To remedy this problem, bitcoin miners run checks on the transactions to ensure the holder hasn't illegitimately spent the same digital token twice. Satoshi Nakamoto set only 1 megabyte of data to fit into one block. Miners check to see the account of the memory used in the digital token or if it's altered and more. That is an oversimplified explanation of what the process entails.
Risks that come with bitcoin mining
Bitcoin is highly volatile, making it hard for miners to know how much their payment will be worth. Even if success is guaranteed, it's not evident if the process will be profitable because of the high upfront cost of the hardware and electricity bills. Research done by the Congressional Research Service shows that one ASIC can use almost the same amount of power as half a million PlayStation 3 devices.
However, people can share the cost by joining mining pools. A mining pool enables miners to share resources or capital. The only disadvantage of sharing costs is that it will also split the rewards, lowering the potential profit.
Bitcoin's value has significantly varied ever since its conception in 2009. In the previous year, bitcoins price has shot as high as $65,000 and dropped as low as $10,000. Because of its highly volatile nature, determining a sure profit is complex, making it risky to incur high purchase fees for equipment.
Even if bitcoin has gained much popularity and has become widely used, some governments are yet to embrace cryptocurrencies. This government's view cryptocurrency skeptically since they operate outside the control of the government. There will be the risk that the government might outlaw bitcoin mining. A perfect example is China, when they ban cryptocurrency stating that it involves many financial risks and speculative trading.
Tax on Bitcoin mining
It's crucial to understand the impact of taxes on Bitcoin mining before venturing into it. The IRS has been hot on the hills of owners or traders in cryptocurrency since there has been a significant shift in asset prices. Here are some key points to consider on tax with regards to Bitcoin mining.
- Capital gains: A capital gain occurs when traders sell bitcoins above the price they received them. They will tax this in the same way traditional assets like bonds or stocks have been taxed.
- Mined bitcoin is income: if someone successfully mines bitcoin and depends on it like income, the tax will be charged since every sell or mined crypto needs to be reported on an IRS form.
- Is it a business: When miners consider mining bitcoin as a business, they can deduct expenses to fund tax purposes? The revenue gained will be the value of bitcoin earned unless they consider mining a hobby, then deducting expenses doesn't seem likely.
Bitcoin mining might involve some risks, but it also offers handsome rewards that might outweigh the stakes if done well.
Advantages of bitcoin mining
What Is halving?
Halving is the process whereby the reward gained from a finished block can be split in half. In the beginning, miners earned 50BTC per block, which encouraged people to mine. Over the years, the price is cut in half once every four years.
The reward per block is 6.25 bitcoins, it might seem small, but its value is equal to $300,000 or 210,000 blocks. Halving has caused massive surges in Bitcoin's price. The first halving saw that one BTC rose from $12 to $1,217. The second halving saw a drop in value to $670, but it then shot up to $2,550 in July 2017.
Bitcoin uses halving as a form of digital inflation, making bitcoins scarce and increasing the value in that sense. Once new miners join and add more hashing power, the time will decrease. Bitcoin will then remedy the situation by resetting the difficulty in mining once every two weeks to restore it to a 10-minute target.
The new gold rush
The major draw from Bitcoin mining is the expectation of earning a reward. However, not only miners can own a Bitcoin or a cryptocurrency token. People can also purchase digital tokens using fiat currency by trading them on an exchange, i.e., Bitstamp using a different cryptocurrency. For example, using NEO or Ethereum to purchase bitcoin, people can also get bitcoins through shopping, publishing content on online platforms that pay using cryptocurrencies, or put up fascinating crypto accounts.
One such example of a cryptocurrency blog platform that is popular is Steemit. On this platform, users can issue rewards to bloggers and pay them using a proprietary cryptocurrency known as STEEM. Then, later on, STEEM can be traded on another platform or the same one for Bitcoin.
Bitcoin is the reward miners receive for their work as an incentive to inspire people to help in mining, which is to confirm and monitor the validity of transactions. Since this responsibility is cast to many users globally, it does not rely on any central bank, meaning no government oversight.
It's termed digital gold since it shares some of the characters with gold. Just like gold, Bitcoin is a rare commodity that is scarce to acquire. There only exist 21 bitcoins that people can ever mine, and it's expected that the last Bitcoin will be mined by 2140. Currently, there exist 18,831812.5 that have been mined.
The number increases almost every ten minutes when new blocks fill and pass validation, and 6.25bitcoins are put in circulation. With all this hype about bitcoins being talked about from front page covers in newspapers to headlines in TV news, what are the advantages of bitcoin?
What are the advantages of bitcoin?
Here are some of the significant benefits you can enjoy using bitcoin.
- Bitcoin transactions provide many benefits, including low transaction fees and quick processing compared to fiat currency transactions.
- Bitcoin transactions are beneficial for global transfers since it's a common currency. People can use it in any country without changing it into the country's currency like paper money.
- People don't need a bank to transact, especially when it comes to high-value trade.
- There is a high potential for paying bills and payments with current advancements in technology like the Lightning Network.
- Bitcoin holds some promising high returns if its market valuation keeps trending like it is currently.
- Safety from payment fraud since miners are constantly monitoring and validating transactions
- It has greater liquidity with high volatility and the potential for large profit margins. But this goes both ways; if the market takes a turn for the worst, many Bitcoin holders will be at a loss.
- It has user autonomy; this simply means it is subject to multiple restrictions compared to fiat currencies. Theoretically, users do not have control of their money. This ensures independence as the price is not linked to some government policies.
Many skeptics have argued that it's the last resort for people to rush into during economic turmoil. What people need to understand is that intrinsic value does not only mean tangibility. Human beings are dangling on the edge of a new era, especially with the ongoing economic downtime cryptocurrency might be the saving grace required. Currently, Bitcoin is averagely holding its weight in the stock market. If it fulfils Satoshi Nakamoto's vision, the world would have an innovative and safe currency it can rely on.
The best way to categorize bitcoin has been a matter of controversy for some time, but it no longer should be. One thing that has got the masses flocking to this digital gold is no one can cheat the system. However, people should know that investing in cryptocurrency is a risky form of investment as it is highly speculative. Before taking any measure to partake in trading or mining bitcoin, ensure you exercise caution.
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