How Bitcoins Work

How Bitcoins Work

Bitcoin is now trading above $41,000. But what is a cryptocurrency anyway? What is the technology behind it? Are there controls? Answers to the most important questions.

What are cryptocurrencies?

Cryptocurrencies were originally intended as a digital means of payment. To ensure that the data underlying these currencies is secure, they are based on the principles of cryptography, the science of encrypting data. With this type of currency, money can be sent transparently, anonymously and within a few minutes over the Internet. They can be used for several things, for example for a long term investment, day trading, cricket online wagering with crypto coins, sports betting on leagues all over the world, or to buy items in online shops.

What is the Bitcoin?

What is the Bitcoin?Bitcoin – invented in 2009 – translates as “digital coin” and is by far the largest, oldest and best-known digital currency, with a share of around 70 percent. Its market capitalization is currently more than $770 billion, according to calculations by the platform. All digital currencies together therefore total 1.1 trillion dollars.

The value of a Bitcoin has fluctuated massively for years. Gigantic price drops have been followed by rapid rallies, and new records have been followed by the next crash. Therefore, the currency does not seem to be particularly well suited as a means of payment, but is currently used more for speculative investment.

What is the technology behind it?

The technology behind Bitcoin is called blockchain and is “open source”, i.e. publicly viewable. Like in a digital logbook, data can be transmitted securely, up-to-date and transparently. This “blockchain” consists of an infinite number of (data) blocks in which all transactions are stored. The blockchain updates itself every ten minutes so that all users have the same “truth”.

In addition to cryptocurrency payments, the technology also offers opportunities for businesses: They can do away with inefficient intermediary instances, as well as manage and monitor supply chains more quickly, for example. The blockchain can be used to gain the trust of customers. For example, they can use it to track production conditions and verify the authenticity of data.

How is bitcoin controlled?

  • Control is one of the big differences with traditional currency. There is no state or central bank behind the digital means of payment. They are controlled in a decentralized manner.
  • All information is stored on the blockchain and cannot be changed without it being noticed. Counterfeiting is therefore not possible according to the current state of research. The blockchain is like a database where everything can be traced.
  • The encryption of transactions runs across all computers in the Bitcoin network. Around the world, so-called “miners” confirm the correctness of transactions and store them in a block of the chain.

How are Bitcoins produced?

In huge “mining farms” in countries with low electricity prices. There, numerous computers calculate around the clock to solve the next computational task. More and more professional farm operators dominate the market.

If the price of a bitcoin rises, a “miner” earns higher revenues. The problem: “Mining” is a costly and energy-intensive endeavor that strains resources and the environment. Due to high electricity prices, private “miners” now hardly stand a chance. This is because the more “miners” go in search of new blocks, the higher the degree of difficulty of the calculation task, the so-called hash rate.

How is the price created?

BTC priceBitcoin is not backed by any real value. The price is based solely on the relationship between supply and demand. There is also no exchange rate policy as with traditional currencies. However, as with traditional currencies such as the euro or the dollar, trust plays a major role in cryptocurrencies. If demand is higher than supply, the price of a Bitcoin climbs – and vice versa.

Why is bitcoin at a record high?

Since the demand for Bitcoins has usually significantly exceeded the supply in recent months, the price has rapidly moved upwards. On the one hand, this is because “halving” in the spring tended to tighten supply.

At the same time, demand increased. More and more banks, companies, issuers and exchanges are incorporating the digital currency into their business. Public interest has also increased enormously in 2020. This is not least the result of a push by the major payment service PayPal, which wants to enable its customers to pay in digital currencies such as Bitcoin.

In the meantime, bitcoin has become an asset class in its own right. In addition to private investors, professional investors such as asset managers or fund providers are also entering the market and mixing Bitcoin in to diversify their portfolios. Particularly due to the Corona pandemic and the resulting further escalating national debt, some investors fear rising inflation. They want to hedge against this with alternative investments. Since Bitcoin is capped in its number, it offers a kind of protection. In addition, the cryptocurrency attracts many speculators who do not want to miss out on a high.

For providing their computing capacity and mutual checks, the “miners” whose hardware has previously found the latest block receive Bitcoins. Every four years, the reward is halved. The most recent “halving” took place last May – the third time in history.

Until then, the reward was still 12.5 Bitcoins; since then, it has been 6.25. To prevent the currency from becoming inflationary, only 21 million Bitcoins are available in total. It is estimated that not until the year 2140 will all Bitcoins be mined.

How does the use and trading work?

To use or trade Bitcoin, a digital wallet is required. This is where the Bitcoins can be managed. It allows access to the linked addresses in the blockchain. The Bitcoins themselves are stored there.

The difference to a bank account is that the name is not in the account address, but a cryptic number that lets the holder remain anonymous. Any number of these can be created. The access data must not be lost, because access is then no longer possible.

Even though PayPal, a major provider, will soon accept Bitcoins as a payment method, acceptance as a means of payment is still quite low. Without the technical know-how and the trust in the decentralized network, this will probably take some time.

Coinbase IPO imminent

The IPO of crypto exchange Coinbase is imminent. After the trading platform filed a corresponding application with the U.S. Securities and Exchange Commission (SEC) in mid-December 2020, things could now move very quickly. Although it has not yet been conclusively clarified whether the American authority will grant the application, this bothers investors only slightly. On the one hand, the market value of the company is already estimated to be very high, and on the other hand, shareholders are already speculating on the entry price for the Coinbase IPO. The crypto analysis company Messari estimates the company’s value at $28 billion (as of December 18, 2020). A few days after Coinbase announced its intention to go public, the crypto exchange FTX already listed so-called pre-IPO futures of the trading platform.

VanEck files Bitcoin ETF with the SEC

The U.S. asset manager VanEck has applied for approval of a Bitcoin ETF with the SEC. That’s according to a form released by the U.S. Securities and Exchange Commission on Dec. 30, 2020. So VanEck is again trying to seek approval for a Bitcoin ETF. The investment firm thus joins a long list of aspirants who also wanted to launch a similar product. So far, however, the SEC has rejected every proposal for a Bitcoin ETF. Most recently, VanEck also suffered a setback in September 2019, when the CBOE withdrew another application to the SEC for a Bitcoin ETF. In Europe, however, the asset manager was pleased to see the launch of a Bitcoin ETN on the German Xetra exchange.