What is Bitcoin | What is Cryptocurrency | Top 5 Cryptocurrencies | How does Bitcoin Work

What is Bitcoin

On October 31, 2008, Satoshi made an announcement on www.metzdowd.com, “I am working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”

Its whitepaper (whitepaper: a detailed explanation of a concept) was published on www.bitcoin.org titled “Bitcoin: A Peer-to-Peer Electronic Cash System.”

What is Cryptocurrency

Although the entire concept of cryptocurrency is derived from Bitcoin, Bitcoin is not synonymous with cryptocurrency; rather, it is a type of cryptocurrency. Just as Toothpaste means Colgate, Photo copy means Xerox, Adhesive means Fevicol, Adhesive Bandage means Band Aids, Vacuum Flask means Thermos, and Search engine means Google, similarly, due to misconception, people consider cryptocurrency to mean Bitcoin. However, besides Bitcoin, there are more than 7800 other cryptocurrencies in existence.

As you already know, the entire concept of cryptocurrency is derived from Bitcoin. The literal meaning of cryptocurrency is secret or encoded.

Cryptocurrency is distinct from physical currency (such as Rupees, Euros, Dollars, Yen, Dinars, etc.) and digital currency (debit cards, credit cards, Paytm, Google Pay, etc.).

Cryptocurrency has its own set of standards that any currency must fulfill to be considered a cryptocurrency.

1> Cryptocurrency is a virtual currency; you cannot physically feel it or store it like traditional currency. Its value exists only in computers, and it has no existence without computers.

2> Cryptocurrency is a decentralized currency, meaning physical currency and digital currency (Paytm, debit cards, credit cards) are regulated by a central body. For instance, the Indian Rupee is regulated by the RBI, and the Dollar is regulated by the Federal Reserve. However, cryptocurrency is not regulated by anyone, and no one has ownership over it, including its creators. In a sense, it is a social currency where nobody has control, and everyone has rights. This is why it is also referred to as a democratic currency.

How Cryptocurrency Works

Cryptocurrency is created and operated based on cryptographic rules, primarily utilizing blockchain technology to track all transactions.

Top 5 Cryptocurrencies

So far, over 7800 cryptocurrencies have come into circulation globally, collectively referred to as Altcoins. Out of these, the existence of around 2000 cryptocurrencies has already ended.

Bitcoin: The market capitalization of the top 5 cryptocurrencies is approximately 80% of the total cryptocurrency market. The combined market value of all cryptocurrencies is around 70 lakh crore INR, out of which Bitcoin alone accounts for a market cap of 42 lakh crore INR.

Ethereum: This is the second most famous and valuable currency after Bitcoin, with a market cap of around 10 lakh crore INR.

Tether: This is the third most well-known cryptocurrency and is a stablecoin.

Red Coin: This is the fourth most popular cryptocurrency, used for giving tips.

Monero: It is most used on the dark web, making it popular among smugglers, black market traders, and those engaged in illegal activities.

Dogecoin: Recently gained popularity; it is a meme-based cryptocurrency created as a joke in 2013 by software engineers Billy and Jackson. It is not as secure as Bitcoin. Due to Elon Musk’s tweets, it has been widely discussed in recent days.

How does Bitcoin Work

Bitcoin is a decentralized currency envisioned by Satoshi as an alternative financial system that would be based on software technology and be outside the control of third parties.

To understand how Bitcoin works, it’s first important to understand how currency works. After World War II, the United States became the most powerful country, and all other countries had to link their currencies to the US dollar, which was backed by a gold reserve. As gold reserves are limited, the more demand for gold increased in the market, the higher its value rose. Bitcoin’s concept is based on this idea, which is why Bitcoin is also referred to as “digital gold”. Satoshi limited the number of Bitcoins to 21 million, similar to how gold is mined through excavation. Bitcoin can also be obtained by solving complex mathematical equations, a process known as Bitcoin mining. (We will learn more about mathematical equations and mining ahead).

On January 3, 2009, the first Bitcoin block was mined, referred to as the Genesis block. Every Bitcoin transaction is recorded in a public ledger called a “ledger”, and a copy of this ledger exists on every system that is part of the Bitcoin network. The people who operate these systems are called miners, and they verify transactions.

Let’s say A wants to send one Bitcoin to B. Miners confirm whether A’s account indeed has one Bitcoin. To confirm the transaction, miners need to solve a complex mathematical equation. Each Bitcoin transaction has a variable, and miners search for this variable. Solving this equation requires high-processing computers. Once the equation is solved, all computers in the network verify it, and the transaction is added to the chain. This technology is called blockchain, and miners are rewarded with valuable Bitcoins for their work. This system is known as Proof of Work, where miners prove that they have performed significant computations to earn rewards.

As the number of Bitcoins decreases, mining becomes more difficult, and the rewards received through Proof of Work also decrease. By 2040, it is estimated that all Bitcoins will be mined. Bitcoin is denoted as BTC, especially on platforms where it is bought and sold.

What is Blockchain

Blockchain is a database system where information of all transactions is added as blocks to a chain, and anyone can access and view this information. This transparency and security of blockchain make cryptocurrencies democratic and highly transparent. A transaction cannot be completed until at least 51% of the system verifies it. Hacking it is nearly impossible since hacking 51% of the system, spread across different locations worldwide, is highly improbable. Due to this transparency and security, blockchain technology is being adopted worldwide.

Blockchain technology can be used for conducting elections in a transparent manner. It allows live tracking of votes for each candidate while maintaining voter privacy.

What is Mining

To verify any transaction, a complex mathematical equation must be solved, and the first to solve it is rewarded with valuable Bitcoins. This process ensures that cryptocurrency isn’t given directly from one’s pocket during a transaction verification. Instead, you are essentially mining in a location where cryptocurrency is stored. Miners require computers, often larger than rooms, and a significant amount of energy for this process. The verification of transactions and adding new blocks is known as mining, and those who perform these tasks are called miners.

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