Understanding the Basics of Bitcoin

Let’s Take a Look at Bitcoin

In recent years, bitcoin, a form of digital currency that is in circulation on the Internet, has attracted attention from all over the world. The symbol for bitcoin is represented as BTC. Recently, there are an increasing number of binary options brokers offer bitcoin as an asset for trading.

Bitcoin is called virtual currency or digital currency and it is not issued in the form of banknote or coin. Different from traditional currencies that are issued by central authorities and countries, in the world of bitcoin, there is no central bank.

The processes of exchanging bitcoins for traditional currencies, such as, US dollar and euro, are carried out on the Internet. Because the payment transactions are not operated through financial institutions, there are no fees. Bitcoins tend to be used in small investments, peer-to-peer trading, and cross-border payments and settlements.

Originally, the virtual currency Bitcoin was used among IT specialists and enthusiasts on the Internet. Later, some big organizations have begun to use bitcoins for payments and settlements. When the financial crisis happened in the Republic of Cyprus during 2011-2012, bitcoin has begun to attract people’s attention as a hard currency like gold.

The exchange rates for bitcoins to traditional currencies are subject to supply/demand balance and economic conditions. It can also be easily influenced by speculative actions. The value of bitcoin thus tends to fluctuate constantly.

3 Bitcoin Features You Need to Know

The Total Number of Bitcoins in Circulation is Limited

Firstly, different from the traditional currencies which are issued by central banks, such as the US dollar and the euro, the total number of bitcoins that can be issued is limited. It is scheduled to issue a maximum of 21 million coins and the number of bitcoins in circulation will never exceed this amount.

Generally, for traditional currencies such as the US dollar and the euro, there is no upper limit for money supply. The central banks control the supply of money and it is possible to issue an unlimited amount of money. Of course, they put the brakes on money growth, however, the maximum amount of money that can be issued is not limited. This is not the case for bitcoins as they are issued in a different way and there isn’t a central authority to control the supply of coins.

Theoretically, bitcoin is not correlated with inflation. This is because that the total number of bitcoins that can be generated is pre-determined and it is impossible for anyone to decide arbitrarily and control the supply of coins. By the year 2140, all the 21 million coins will be generated. Due to a limited number of bitcoins in circulation, it is also reasonable to predict that the price of bitcoin will rise.

Zero or Low Fees for Transactions

When user A has the bitcoin address of user B, it is possible to transfer bitcoins to user B instantly no matter where he lives. Even though sometimes transaction fees are required, they are so small that one can just think it as fee-free transactions.

If people transfer money to each other through intermediary banks, transaction fees that are accompanied with the transferring process will be charged and they will become the profits of banks. In the case of bitcoin, since it is not controlled by a central authority or bank, the fees will not become the profits of any institution. When users transfer bitcoins to each other, the transaction fees will be rewards provided to miners so as to keep the network in good condition.

Basically, the required transaction fees are subject to data size. If the conditions are fulfilled, such as, data size is below 1 kilobyte and the amount for transfer is above 0.01BTC, it is possible to process transactions without any fees. Usually, 0.0001BTC is required for transferring a small amount of bitcoins.

A Peer-to-Peer Network

The system of bitcoin is constructed in a peer-to-peer (P2P) network architecture. It is maintained by all users who have downloaded the bitcoin software program. Since there is no central bank, there is no VISA or MASTER. The database of transactions is disclosed to all users and it is maintained on the P2P network.

In bitcoin, there is not a single authorized agent to maintain the system and guarantee the value of coin. The system is maintained by all the users on the P2P network in accordance to pre-determined rules, which is said to be one of its most important characteristics.

How do Bitcoins Soar in Value?

There are mainly three ways to obtain bitcoins.

1) Mining
People can mine new bitcoins.

2) Transferring
People can transfer bitcoins to one another.

3) Buying
People can buy bitcoins using traditional currencies.

Originally, bitcoins are acquired by using an application called “Bitminter” to solve complex computational problems. The process of acquiring bitcoins is referred by people as “mining”. Every 10 minutes, 25 bitcoins can be mined. As the difficulty of mining increases, it requires more time to find new coins. Now, it becomes difficult to use just normal PC to compete with others on the network.

Since bitcoins are generated by software programs and the maximum number of coins is limited to 21 million, considering that it is a form of virtual currency, some miners began to wonder whether bitcoin has value. Then, they started to trade bitcoins and exchanged 100 bitcoins for 1 dollar.

In particular, bitcoins are different from the traditional currencies issued by governments. Due to the fact that there is an upper limit on the supply of bitcoins, a lot of users may think that bitcoins will be more valuable than the currencies issued by central authorities. And then, they trade for bitcoins by using more traditional currencies, such as exchange 2 dollars for 1 bitcoin, exchange 10 dollars for 1 bitcoin, and so on. This has led bitcoin to continue to soar in value.

Because of this, virtual currencies are paired with traditional currencies and bitcoin currency pair is now one of the currency pairs in binary options trading.

The Rise and Fall of Bitcoin

Trading bitcoin is similar to trading traditional currencies. They can be easily influenced by economic indicators and world situation. On December 18, 2013, China imposed domestic regulations on using bitcoins. Soon after the announcement was made, the value of bitcoins slumped. At the same time, as quantitative easing has seemed to begin to work in the US, the confidence in the US dollar has increased. As investors expect that interest rate will be raised, they began to sell bitcoins and buy US dollars.

On the other hand, the demand for bitcoin is increasing. While mining of bitcoin becomes increasingly competitive, a lot of users buy bitcoins at a high price. Therefore, there is still a high demand for bitcoin and the value of bitcoin rises.

By considering that many miners are buying bitcoins and the number of platforms that accept bitcoin for payments is increasing, as well as the total number of bitcoin in circulation is limited, bitcoin has the potential to rise in value in the future.

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