Bitcoin trading has become fairly popular in recent times. Investors often use Bitcoin as a web-based trading currency. As it does not include exchanges, Bitcoin trading has a critical distinction in relation to other currencies. It is a decentralized digital currency that is also known as Cryptocurrency. This virtual currency was developed by Satoshi Nakamoto, an unidentified user and it was implemented on 3rd January 2009.
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What are Bitcoins?
Bitcoins are traded online and they are not limited to any country or to a particular currency or any financial regulatory. Hence, they are not influenced by any factors from the economy. Transactions are recorded in a blockchain, which shows the transaction history for each unit and is used to prove ownership. Bitcoins can be used to purchase any services or products from the sellers who accept this currency. They are accepted globally, other than the countries which do not allow the trading of this instrument. One can also transfer Bitcoin from one individual to another individual. The rate at which Bitcoin fluctuates in a day is around 30% and on the basis of this one can assume that the risk involves in this instrument is very high.
What is Blockchain?
Blockchain is a type of software that is used to record information of various transactions of various investors by the use of cryptography. Under this system, blocks are created for each and every transaction with each time-stamp and these blocks are connected with each other and a cryptographic hash (hash is a unique input of the data which converts this data into an encrypted output) of every block is connected with the previous block. As and when you enter any new data, a new block of that information is created and it will be linked to the previous block and a chain of such block is generated, which is known as Blockchain. These records are publically displayed with the help of Bitcoin miner’s entries every data of every investor whether they buy, sell, transfer or make payment with Bitcoin.
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How does Bitcoin transaction work?
Bitcoins are stored in the digital wallet of any app on the phone/computer of every investor. As Bitcoins are web-based, individuals can send Bitcoin to other individuals from their wallets, which is similar to sending cash digitally. Individuals can buy Bitcoin by investing real money into it or they can accept payment from other individuals in the form of Bitcoin or they can be created which the help of a computer file. When an individual gets Bitcoins a hash is generated and the transaction is recorded and when that individual makes a further transaction for buying or selling that will also be recorded under the Blockchain system of Bitcoin. This helps to see the history of a particular individual or investor which results in preventing people from sending Bitcoins which they do not owe and further preventing in making copies of various Bitcoins.
What is Bitcoin Mining?
Bitcoin Mining is basically a process of adding each and every new transaction that takes place to a Blockchain system. This helps every investor to access the ledger and help to confirm every transaction. In short, mining is the type of record-keeping process done through the use of computing power. It involves the solving of computationally challenging puzzles in order to recognize a new block that is added to the blockchain. Various rewards are given to Blockchain miners when they add a new transaction to the chain. Based on a peer-to-peer network, this enables every single miner around the world to contribute their computing power to maintain the network, validate transactions, and keep them safe.
Pros of Bitcoin:
- Bitcoins are not bound by any country or economy and this help business people to make payment internationally. They can save time from waiting in a special process to create debit or credit cards that work internationally from banks.
- As the risk of the portion is very high the amount of return from Bitcoin is also high or we can say unexpected.
- As Bitcoin transactions do not require intermediaries, there are relatively low transaction costs.
- It is flexible because individual under Bitcoin transactions can control their transactions and no one else can withdraw any money from his account.
- With the help of the Blockchain process, every transaction detail is available to every individual who has invested in Bitcoins.
- As records of every transaction are maintained under the Blockchain process no individual can try to resale their Bitcoins.
Cons of Bitcoin:
- There is no legal obligation for Bitcoin transaction and because of this if any error occurs no is responsible to take action against this system.
- Many countries have banned Bitcoin trading in their economy and because of this, an individual cannot transfer his payment through Bitcoin in that particular economy.
- There is a unique ID for every customer to access his wallet but once this key is lost and before that the person has not to get back up for this then there is no other way to access the wallet and the customer can lose his investment.
- There is no special parameter on which one can predict the price of Bitcoin thus it becomes very difficult to manage its future outcomes.
- The rate of volatility is very high in Bitcoin and this creates high risk in this instrument.
Bitcoins are useful in many ways especially to investors who invest in this instrument for long-term purposes and when they are having high personal disposable income. But at the same time, this instrument is highly risky and no legal agreement is given for this instrument and it fluctuates at a very high rate even wit in a day thus this is advisable to people not to invest in such risky investment who do not have a huge amount of saving for them.
Author: Charmi Mehta
About the Author: Charmi Mehta is currently pursuing MBA with a specialization in Finance from the Department of Business Administration, Bhavnagar. Charmi is very much interested to work with data and its analysis and she is also fascinated by the financial market.