Bitcoin is a decentralized, peer-to-peer, digital currency as well as a payment system, which doesn’t fall under the control of any central authority. The value of bitcoin is determined solely by the market, through the natural, age-old dynamic of supply and demand.
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How does bitcoin work?
The heart and soul of bitcoin is the distributed public ledger called the blockchain, in which every bitcoin-based transaction is registered. Such transactions take place between users directly, without any intermediaries and they are verified by network nodes, before they’re recorded in the blockchain. All these operations are performed by a network of computers belonging to bitcoin miners. Maintaining the blockchain and sorting out transactions is handled by miners, who are rewarded with bitcoins for the work they do. Besides sorting out transactions and blockchain-related information, miners have to solve increasingly complicated mathematical problems too. Due to these mathematical artifices, the mining of bitcoin has become extremely difficult and no longer profitable for the rank-and-file miners. Nowadays, advanced ASICS (Application Specific Integrated Circuits) are used, and even so, mining is only profitable in Iceland and China, where local-specific conditions tied to yearlong cold and cheap electricity are major factors.
Besides mining, bitcoin can be obtained through trading, or through its acceptance as payment for various goods and services.
Value-wise, bitcoin’s history has been a proper rollercoaster-ride. There were several cycles of boom and bust and it looks like currently we’re riding atop another boom-wave.
Why bitcoin has Grown So Quickly
Currently worth more than $2,300 per unit, bitcoin’s beginnings were rather humble. Created by a programmer – or rather, by a team of programmers – known as Satoshi Nakamoto, bitcoin was released as an open-source project in 2009. Embraced by a number of programmers drawn in by the obvious advantages presented by a decentralized, free-floating currency, bitcoin began to gain gradual acceptance, also aided by the fact that it was one of the first-comers to the crypto-currency scene. More and more merchants began accepting bitcoin payments and as central banking authorities made it clear they wouldn’t push law enforcement to crack down on the budding digital currency economy, the value of bitcoin exploded.
Online exchanges and wallet services sprung up, looking to make it easier for people to purchase, hold and spend bitcoins. While some of these services ended up going down in flames (in some cases nearly dragging bitcoin down with them into oblivion), bitcoin prevailed and it even managed to thrive.
Although most of the rank-and-file users turn to an exchange to sell their bitcoins for fiat currency, in some cases – especially when larger volumes are concerned – various brokers handle such transfers in an OTC (Over The Counter) setup. Besides protecting the currency from increased volatility, such OTC trades handled by seasoned brokers simply take a shortcut to solving a problem.
Besides bitcoin brokers, the virtual currency is also traded by reputable forex brokers who have added bitcoins to their selection of tradable assets. Through these brokerages, bitcoin trading profits are realized the traditional way: by buying low and selling high.
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