What is Bitcoin and How Does It Work?

Bitcoin is a decentralized digital currency that operates independently from a central clearing mechanism, unlike traditional fiat currencies. It was created in 2009 by an unknown entity operating under the pseudonym Satoshi Nakamoto.

Bitcoin enables peer-to-peer transactions over the blockchain—a shared and immutable digital ledger.

This public ledger records all transactions. Each time a transaction occurs it’s recorded onto a block. Several transactions are contained on each chain, with each transaction being recorded onto a new block.

HOW DOES BITCOIN GET ITS VALUE?

Bitcoin derives its value from several factors:

1. Scarcity: 21 million bitcoins will be created, with all being mined near the year 2140.
2. Decentralization: Bitcoin is fully decentralized, which means there is no governing body involved.
3. Security: Cryptography makes bitcoin very secure.
4. Global Reach: Bitcoin can be transferred easily.

While the exact origin remains clouded in mystery, Bitcoin was created by an anonymous person—or group of people—under the pseudonym Satoshi Nakamoto. Despite exhaustive inquiries, Satoshi Nakamoto’s identity remains unknown. Satoshi Nakamoto was rather active in the bitcoin community until 2010. Their whereabouts are still discussed in the community, although it's unlikely that an identity will ever be unveiled at this point.

Bitcoin mining is the process by which bitcoins are minted or created. It is done through the process of solving sophisticated math problems that verify the transaction on the blockchain. Once a transaction is successfully verified, a bitcoin reward is issued. The bitcoin reward is cut in half every four years or so, which means that mining bitcoin moving forward will be less valuable as we get closer to the maximum number of bitcoin allowed.

HOW ARE BITCOINS CREATED?

Bitcoin miners solve algorithmic problems by using computers to break a cryptographic puzzle and validate transactions, which subsequently adds bitcoin to the blockchain. The miners are rewarded with ownership of the new bitcoin. The reward for mining bitcoin and validating transactions is currently set at 3.125 bitcoin.

Bitcoin mining is an essential process in the blockchain. Miners authenticate and bundle transactions into blocks and solve complex puzzles through the Proof-of-Work system. A miner that successfully solves these puzzles is rewarded with Bitcoins, which periodically decrease—a process known as "halving."

1. Transaction verification: Miners verify transactions, serving a vital role in the functioning of the blockchain. Miners collect transactions that are waiting to be verified and bundle them into a block, which acts as the ledger for all transactions. Those ledgers are then added to the chain of prior blocks, known as the blockchain.
2. Solving the Puzzle: Miners need to solve complex mathematical puzzles by finding a “nonce,” which is a number only used once. For bitcoin, this process is referred to as “Proof-of-Work," or PoW. Those nonces are inputted into the cryptographic hash function—known as the SHA-256—alongside a block’s data until a hash is found that meets a specific condition.
3. Reward: This task becomes more difficult as time goes on, ensuring that blocks are added every 10 minutes regardless of the computational power on the blockchain network. Miners are rewarded with a new bitcoin once they solve this puzzle. Every four years there is an event called “bitcoin halving” where the number of new bitcoins received by a miner is cut in half.

HOW LONG DOES IT TAKE TO MINE BITCOIN?

The time to solve the puzzle and receive a reward varies, but it typically takes around 10 minutes to mine one block, and that currently earns miners 3.125 Bitcoins. As of the second half of 2024, that reward would be about $180,550 based on the market value of bitcoin. The value of those earned bitcoins also depends on a miner’s hardware and electricity costs.

IS BITCOIN MINING PROFITABLE IN 2024?

Because the puzzle gets harder to solve as time goes on, it essentially becomes more expensive to mine bitcoin. A miner needs to add more computational power, which requires upgrading their hardware.

The required hardware also changes. In the early days of mining, a central processing unit (CPU) was often enough, but today a miner needs high-powered graphics processing units (GPU). Advanced hardware designed specifically for mining such as ASICs are often replacing GPUs today.

The more powerful hardware requires more energy to run, which increases a miner’s energy costs.

1. Open a tastytrade account
2. Enable cryptocurrency trading
3. Select BTC/USD
4. Place your trade

Blockchain technology is a decentralized digital ledger shared among the nodes of a computer network. It is essential to how cryptocurrency systems function, supporting a secure and decentralized ledger that securely records all transactions. The data is stored via blocks, which are linked through cryptography, ensuring a secure system that is permanent once a block is added to the chain. This eliminates the need for auditors and other third-party services and ensures that an entity can’t manipulate the transaction record.

BITCOIN SOFT FORK

A soft fork changes the software protocol in a backwards-compatible way where previously valid blocks become invalid. Because it is backwards-compatible, nodes using the previous rules are accepted in the new blocks. Although, new blocks created after the change may not be accepted by nodes that have not updated their software.

BITCOIN HARD FORK

A hard fork is a radical change to the protocol, resulting in a separate blockchain that isn’t backwards-compatible like a soft fork. Because of this, nodes running on the old software will not recognize transactions or new blocks that are created after the hard fork. This hard fork results in a “new” type of bitcoin or cryptocurrency. A notable example is the hard fork that occurred in August 2017, which resulted in Bitcoin Cash.

Yes, bitcoin can be converted to cash using tastytrade by selling your bitcoin position. That position sold will settle to cash, which will then be available to make another trade, whether it is in bitcoin or another asset.

Bitcoin can also be converted to cash through bitcoin ATMs or peer-to-peer platforms (P2P). These methods aren’t as popular and are in fact becoming less popular as more brokerages start to support cryptocurrencies.

Due to cryptographic security, the decentralized nature, and blockchain technology, bitcoin security is considered safe. A breach specific to the security of a broker could make your bitcoin vulnerable, although this is unlikely given the security protocols employed by regulated brokers.

Hackers attempt to exploit vulnerabilities that aren’t inherent in the blockchain itself. For example, sending your bitcoin to the wrong address could result in it being unrecoverable. There are certainly unique qualities to bitcoin, so it is imperative that you understand how trading and owning bitcoin differs from the traditional stock market. As for investment risks, that is up to you to decide. Market volatility could result in wild price fluctuations.

Bitcoin is a decentralized digital currency that operates on blockchain technology. It offers unique benefits such as decentralization, security, and global utility. Although bitcoin mining and trading can be profitable, they require significant investment and understanding of cryptocurrency market dynamics.