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What is Bitcoin ? How does it work in the Blockchain ?

   Whether you've been holding since the early days of Bitcoin or recently heard your weird uncle tell you to invest in cryptocurrency, you might be wondering exactly how Bitcoin works. While this newish type of virtual currency has made headline after headline over the last decade, its underlying concepts and function are simpler than you might think.


 Let's take a look at the basics. Bitcoin at its core is a software protocol based on the blockchain. The digital token has a value based on what others are willing to pay for it, or simply based on the concept of supply and demand. When it first came out, a Bitcoin was worth about 0.0008 cents, but as more people bought into the idea and bought the coin, the price has now climbed to over 50,000 U.S. dollars. Bitcoin is a digital currency based on a decentralized system that records each transaction on a Ledger, also known as a blockchain. That may sound confusing, but it essentially means that the Bitcoin network isn't run from some guy's basement on the other side of the world. Rather, it's ran on thousands of computers across the world simultaneously, without one centralized controller, while many people just buy Bitcoin through Coinbase or other apps, the digital tokens themselves are actually created by Bitcoin miners, which use high-powered computer rigs to solve complex math problems. They confirm transactions on the decentralized blockchain to keep the buying and selling moving smoothly. After a block of transactions is confirmed by miners, the miners themselves are rewarded with a small number of bitcoins. Bitcoin mining is ultimately the underpinnings of how Bitcoin works.


 Miners lend their computing power to the blockchain and get rewarded with digital currency. On January 3rd, 2009, Satoshi Nakamoto mined the first block, the Genesis Block, and was rewarded 50 bitcoins. This brought Bitcoins into existence. But let's learn a little bit more about blockchain. Blockchain isn't Bitcoin as much as Bitcoin isn't the blockchain. Blockchain itself is actually a software protocol that can be used in many less exciting applications to the normal listener like manufacturing, software compliance, banking and other software applications, the first blockchain was described by Satoshi Nakamoto 2008, the creator of Bitcoin. Initially, the two terms were always used together, but blockchain diverged into an even bigger software and technology phenomenon. Blockchains are simple in theory, it's a digital chains of blocks, each block being a group of information. Think of it like folders. In a sense, the blocks are arranged in order chronologically, and they cannot be unordered. It's like a timeline of digital events that are independently verified and securely held through a decentralized network, meaning thousands of computers across the world. You could agree to pay a friend $20 through a blockchain and that agreement would forever be on the blockchain, ensuring you pay when the time comes. It's this secure software protocol that stands as the basis of Bitcoin by having a secure transaction network in the blockchain, Bitcoin tokens are transferred from person to person, securely tracked through blocks of information, all decentralized and anonymous, run by mining computers across the world. Because blockchains are distributed ledgers, the entire Bitcoin blockchain is public. By making such a complex amount of information public, it can be ensured that no changes are made over time because other people would see the changes being made or see that their blockchain that they can see different than the one other person is providing no central authority overseas Bitcoin transactions. Rather, the miners work together to validate them. Bitcoin users will generally have wallet addresses and that's like a string of letters and numbers that can be identified in the blockchain and serve as a sending or receiving location. For digital currency. This address serves as a unique identifier on the blockchain anytime Bitcoin is sent or received to or from this address it's logged in the chain, and it can be traced back and forth and back and forth. 



But what makes Bitcoin worth anything at all? Well, nothing other than what people are willing to pay for it. Well, that and that. There can never be more than 21 million Bitcoin in existence. This creates a finite supply. The only way new Bitcoin is made is through mining, or as a reward to miners for validating transactions. The amount of Bitcoin a miner gets for processing a block slowly decreases over time in a process known as having. The reward for mining is cut in half for every 210,000 blocks mined. This process is set to continue until 2140 when all of the bitcoins, all 21 million of them, are mined. After this, miners will get paid fees based on a structure to continue processing transactions on the blockchains. This also means that mining can get less profitable over time as the rewards decrease. However, that's only if the price stays the same. If the price per Bitcoin goes up. If it goes up faster than the rewards decrease, mining can actually get more profitable, which sometimes happens. The limited supply of Bitcoin also means that there's a supply and demand issue. As we mentioned, if more people wanted to buy bitcoins due to a limited supply, the price would need to go up. That's why we've seen a such meteoric rise in bitcoins price. If the lowest owner of Bitcoin doesn't want to sell for anything less than $50,000, then Bitcoin would be valued at $50,000, because that's the lowest you could buy it for. That's a little bit oversimplified for supply and demand, but essentially Bitcoin is worth what people are willing to pay for it. It doesn't have any intrinsic value. All of this serves as a very basic overview of bitcoins and blockchains, though. We haven't really gone into hashed data, different risks to the Bitcoin network, like something called a   51% attack, or even the cryptography and security that goes into making the blockchain and blockchain wallets completely secure. However to the casual or beginning Bitcoin owner or buyer. That info can sometimes overwhelm and confuse, and warrants its own individual research. In summary, Bitcoin is a digital token validated by a secure, decentralized software network that runs off of computers all around the world. Known as miners, these miners ensure people can buy and sell bitcoins securely, and for their trouble, the miners get rewarded with a small amount of new Bitcoin.


 You can only ever be 21 million Bitcoin in existence and due to that limited supply, as more people want to buy Bitcoin, the price goes up and up until more people are willing to sell it at a given price, supply and demand. No one really knows what's going to happen to Bitcoin or its price, but one thing is for sure, fortunes have been made and lost on the cryptocurrency, but it's likely here to stay. But of course when you make a fortune. The IRS wants a piece of it. If you've bought Bitcoin or any cryptocurrency, you're going to need to file income tax on your earnings or risk being audited by the IRS. In the US, one of the simplest ways to do that is by using legible. Their tax software solution allows you to quickly create tax documents for your cryptocurrency activity for the tax year and analyze your gains and portfolio value throughout the year and be able to maximize your tax savings at the year by making smart informed moves you can learn about the coherent secure system and use it to file your taxes.


 


 

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