2017 was the great year of the Bitcoin. Already since 2012 the media interest in the cryptocurrency increased more and more and since then the price has been going steadily upwards. In 2011, a Bitcoin was still worth a few dollars, in 2015 it was still worth 200 euros. The price records of over 20.000 euros last year were not foreseeable at the time. Still many investors want to get into trading bitcoins, but first it is important to understand the technical details around bitcoins before getting into trading the cryptocurrency. What are Bitcoins and how do Bitcoins work?? Those who have created a wallet can transfer money and receive money via their bitcoin address. Each Bitcoin address can be used only once. Bitcoins can also be bought and sold via a trading platform or crypto exchange. If you are more interested in the price movements of the cryptocurrency, you are in the right place with a broker.
What are Bitcoins?
Bitcoins first came into the conversation in 2008. At the time, a person or group by the name of Satoshi Nakamoto, whose identity or identities remain unclear to this day, published a white paper explaining how Bitcoins work and provided the Bitcoin software. A decentralized network was created where independence and anonymity are very important. Bitcoin is based on an open-source system that can be downloaded by anyone.
Those who want to use Bitcoins as a means of payment can use them to pay at hotels, restaurants and some stores, among others. Some world-renowned companies and organizations also offer payments and donations via Bitcoins. In Austria and the USA, it is already possible to obtain Bitcoins from vending machines.
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Number 1 cryptocurrency
Bitcoin is now almost ten years old. This makes Bitcoin the oldest cryptocurrency. In the meantime, there are over 1.500 cryptocurrencies that have followed the example of Bitcoin. However, Bitcoins is still the undisputed market leader. No other currency comes close to the success of Bitcoin. Some competitors are focusing differently than Bitcoin. Thus, Ethereum extended the cryptocurrency and the blockchain with so-called smart contracts.
Conclusion: What are Bitcoins? The answer is a cryptocurrency based on a decentralized network and accounting system called the blockchain. Bitcoins came into the conversation in 2008 and are now the number 1 among over 1.500 cryptocurrencies.
Innovative technology and cryptographic methods
With Bitcoin, the so-called blockchain plays a big role. The entire technology of the cryptocurrency is based on it. The blockchain is considered very innovative and is also attracting more and more interest in business and industry. All transactions are stored in this public ledger system and are publicly viewable within the network. However, it is not possible to see by whom a transaction was carried out. Confirmations of bookings are also made via the blockchain. It is chronologically structured and based on cryptography. The blockchain could have as big an effect on our lives as the development of the internet once did.
The blockchain is now several gigabytes in size. Those who download a wallet to their PC therefore need a lot of storage space. The blockchain is growing steadily. A new block of transactions is added about every ten minutes. Data cannot be lost as it is stored on multiple computers. The blockchain is also repeatedly defined as a digital accounting system.
Cryptographic methods behind the cryptocurrency
Bitcoins are a digital means of payment that is based on cryptographic procedures. The goal was to develop a digital and secure means of payment. Bitcoins work without the influence of states or banks and is based on a decentralized peer-to-peer network. Therefore, no central clearinghouse is needed. Cryptographic procedures ensure that all transactions in Bitcoins are encrypted and that all Bitcoins indeed belong only to the recipient. In your wallet you can always see how many Bitcoins you have at your disposal.
Conclusion: the cryptocurrency Bitcoin is based on cryptographic procedures, which make the digital currency very secure, as well as on the blockchain. All transactions are stored in the blockchain. However, it is not possible to trace back from whom they were sent.
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Transactions with Bitcoins
How do bitcoins and cryptocurrency transfers work?? Two keys, one public and one private, are required for transactions between two wallets. Each transfer is added to the blockchain. A wallet consists of a secret block of data, the private key. This is also called seed and is necessary to sign transactions. A mathematical proof is used to ensure that a transaction really originates from the owner of the particular wallet. This signature also prevents a transaction from being tampered with after it has been sent. This is another reason why Bitcoins are considered to be particularly forgery-proof.
Transaction confirmed through the network
A transaction is inserted directly into the network and within ten minutes the confirmation of the transaction begins. Each additional confirmation makes the transaction increasingly secure. This is where the so-called mining comes into play. New Bitcoins are created via mining. Already in the protocol of the cryptocurrency from the year 2009 it was determined that a maximum of 22 million Bitcoins can be mined. This limit is intended to prevent inflation.
Mining within the network
Via mining, transactions are thus confirmed and integrated into the blockchain. The network consists of a large number of computers distributed all over the world. Thus, the blockchain is distributed decentrally around the world. A transaction consists of a block that is chronologically fed into the chain. This must comply with all cryptographic specifications, only then can it be confirmed by the network. This also prevents old blocks from being changed. A change would result in new blocks being invalid as well.
Mining can only ever be carried out by several people. Thus, each transaction is confirmed by multiple people. This prevents individuals from being able to control what is added to the blockchain or single-handedly change the blockchain.
Mining difficulty changes
A flexible algorithm ensures that the difficulty of the mining tasks is adjusted every two weeks and adapted to the overall performance of the network. If there is a lot of network power, the tasks become more difficult. Since Bitcoins is now very popular, there are also more users, so the network performance increases.
This is to protect Bitcoin from a 51 percent attack, meaning that one user controls more than 50 percent of the computer’s power. This would allow him to confirm and also forge his own transactions with the help of a very powerful computer. At present, however, it is extremely unlikely that such an attack can occur.
Conclusion: a posting via Bitcoin is usually confirmed for the first time within ten minutes. More confirmations to follow. This is also where mining comes into play. This is how new blocks are created and added to the blockchain. Mining becomes more and more complex due to the increasing number of users.
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Access to your own wallet
When a wallet is opened, two keys are automatically generated; one public key and one private key. The private key is needed to generate the public keys of other users and to create signatures. The public key can be compared to the account number. The private keys are used exclusively by the user himself.
Each participant can theoretically generate an infinite number of key pairs. These are then stored in the wallet just like your own Bitcoins. A user can create a transaction order of any amount. The public key of the recipient is required for this purpose. Each order is first signed using the private key and then published on the network. The blockchain then takes over the confirmation and permanent storage of the order.
Secure password for wallet
A very long and particularly secure password of 51 characters is used as the access key to one’s wallet. This can be compared to a PIN or password used in online banking. Each user should keep their private access key secret and secure. The private key works only together with the public key. Without the public key, a message cannot be decrypted.
Bitcoin address and digital signature
The bitcoin address is a shortened version of the public key and is known throughout the network. The bitcoin addresses are created using the ECDSA algorithm. They consist of any string of characters, but is shorter than the private or public key. The Bitcoin address and the corresponding key are required for a bank transfer.
In addition to the two keys, a digital signature is also required for a bank transfer. This ensures that only the account holder can make transfers. This ensures that no one can forge a wire transfer. This digital signature is also known from other activities on the Internet and is important for secure communication. For example, it is also used for encrypted e-mails.
Conclusion: every user has a private key and a public key. This allows the user to access his wallet and carry out and receive transactions. To receive money, a Bitcoin address is required. A digital signature provides the necessary security.
About the provider 77% of small investors’ accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. Crypto investments are made by eToro (Europe) Ltd. offered and custody is provided by eToro Germany GmbH. Your capital is at risk.
Advantages of Bitcoins
- a decentralized payment system
- Without government regulation
- anonymously
- can be used worldwide
With Bitcoins, very fast transfers across national borders are possible. The cryptocurrency is controlled exclusively by the blockchain. The decentralized payment system works without interference from central banks or governments and can still be used almost anonymously. This clearly distinguishes cryptocurrencies from established currencies.
All Bitcoin decisions, such as technical updates, are made within the community. So as long as users agree on security, no one can manipulate the blockchain.
Conclusion: cryptocurrencies are very different from established currencies. They are decentralized in structure and independent of states or banks. All decisions concerning Bitcoin are made by the users themselves.
To deal with Bitcoins before starting to trade
Even people with little IT knowledge can usually get very comfortable with the technology behind Bitcoin after a learning curve. Every newcomer should, however, get well acquainted with the question “What are Bitcoins and how do Bitcoins work?” and only then start buying Bitcoins. The Bitcoin network sometimes compared to a bank, where each user has their own account. However, this bank is organized in a decentralized manner, so it does not have a central headquarters that is in charge.
Networked via software
All networked computers work with a special software, the so-called Bitcoin Client. Users can also access their accounts through it. Anyone who downloads a Bitcoin wallet to their PC automatically becomes a member of the blockchain. However, wallets can also be opened for the smartphone or via an online provider. Anyone who wants to buy Bitcoins needs a wallet to do so.
Anyone who downloads a desktop wallet automatically becomes part of the network and can also participate in the mining process. Since the entire blockchain is downloaded here, a lot of storage space is required on the computer. Wallet are also available for the smartphone and via online providers. A lot of security is promised by hard wallets via external storage media such as USB sticks and paper wallets via QR codes on paper.
To the provider 77% of the accounts of small investors lose money when trading CFDs with this provider. You should weigh whether you can afford to take the high risk of losing your money. Crypto investments are managed by eToro (Europe) Ltd. offered and the custody is carried out by eToro Germany GmbH. Your capital is at risk.
Bitcoins available as a unit of account
By the way, Bitcoins are not stored as a file in a wallet. This would mean that you could copy Bitcoins. Bitcoins are rather a unit of account stored in the blockchain. Therefore, one’s own number of Bitcoins is stored in one’s own wallet and in the blockchain. In the wallet you can also see at any time how many bitcoins you own;so practically your account balance. For security reasons, many investors use multiple wallets. In the event of a hacker attack or loss of password, this means that not all bitcoins are immediately lost.
Enter the trade well informed
Only those who answer the question “What are Bitcoins??” can answer conclusively for itself, should get into the Bitcoin trade. One should learn about the technology behind Bitcoins and can also see if an alternative like Ethereum could possibly be enticing as well. But not only “How do Bitcoins work” should be sufficiently answered, you should also know the risks in dealing with the cryptocurrency.
There are now laws and regulations surrounding Bitcoins in some countries, but there is still no international, uniform regulation to date. However, many trading platforms, crypto exchanges and brokers in Europe are regulated and have a license from the relevant regulatory authority.
Here one should compare the individual providers well, among others regarding security, costs and payment methods. Online brokers can be an interesting alternative to crypto exchanges and trading platforms. They have often been active on the market for a long time and are subject to the laws and regulations of the country in which they are based.
Ultimately, everyone must choose for themselves the provider of their choice. Many investors are also active on multiple platforms. An important criterion here is whether you want to buy Bitcoins directly or bet on price movements. When buying directly, crypto exchanges allow trading to be completely automatic.
Dangers around Bitcoins
With Bitcoins, there is a risk that you can suffer high losses. Bitcoins is still a very young currency, which is subject to large fluctuations. This was already the case in the early years and has hardly changed so far. Even news that may seem insignificant at first glance, such as a critical statement by a bank chief, can quickly drag down the price. Very fast changes in the market are not unusual with Bitcoin. The price can even change several times a day. Therefore, it is important to always keep an eye on the market and also follow all news related to Bitcoins.
Conclusion: Who wants to get into trading with Bitcoins, should first answer the question “What are Bitcoins??” answer in conclusion. After that, you can enter the trade well informed and choose the provider of your choice. In addition, one should be aware of the dangers in Bitcoin trading and always observe the market.
To the provider 77% of the accounts of small investors lose money when trading CFDs with this provider. You should weigh whether you can afford to take the high risk of losing your money. Crypto investments are made by eToro (Europe) Ltd. offered and custody is provided by eToro Germany GmbH. Your capital is at risk.
Conclusion
Bitcoins first came into the discussion in 2008. The identity of the inventor is still unclear today. Then in 2009 the first Bitcoins were mined. In the early years, a bitcoin was worth only a few dollars. Since 2012, however, the price has been going steadily upwards. Then last year it reached over 20.000 euros its temporary peak.
Bitcoins are a decentralized payment network and digital monetary unit. The cryptocurrency is based on innovative blockchain technology and a peer-to-peer payment network. In the blockchain, all transactions that have ever been made are recorded. If you want to make transactions, you need a so-called wallet. It also contains two cryptographic keys that can be used to access one’s wallet and send and receive transactions.
Each transaction is confirmed within ten minutes for the first time in the network. This is also where the so-called mining comes into play. Via solving cryptographic tasks, transactions are confirmed, new blocks are created and new Bitcoins are mined.
Those who want to get into bitcoin trading should study the cryptocurrency well. Only those who can answer the questions “What are Bitcoins and how do Bitcoins work” should start buying and selling the cryptocurrency. Especially due to the volatility of cryptocurrency, trading is still associated with many risks.
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To the provider 77% of the accounts of small investors lose money when trading CFDs with this provider. You should weigh whether you can afford to take the high risk of losing your money. Crypto investments are made by eToro (Europe) Ltd. offered and custody is provided by eToro Germany GmbH. Your capital is at risk.