Bitcoin: 6 Questions To Understand How The Most Used Cryptocurrency Works And Why It is Risky

By Olawale Adeniyi

The price of Bitcoin fell below $34,000 for the first time in three months, following new cryptocurrency restrictions imposed by China.

Beijing on Tuesday banned financial institutions and payment companies from providing services related to cryptocurrency transactions.

He also cautioned investors against speculative crypto trading.

This follows Bitcoin’s drop of more than 10% last week after automaker Tesla said it would no longer accept the currency.

Tesla shares fell more than 3% on Wall Street even though the company, owned by Elon Musk, still holds around $1.5 billion in cryptocurrency.

When its CEO tweeted in February that he had purchased $1.5 billion worth of bitcoin and planned to accept it as a method of payment, the price of the cryptocurrency exploded.

And when Musk said in another tweet on Wednesday that he wouldn’t accept bitcoin from people wanting to buy his cars, his price dropped to 15%.

If a single tweet can suddenly raise or lower its price, it is surely a volatile asset that critics equate to a Ponzi scheme, in other words: a bubble about to burst.

But bitcoin has historically only evolved, according to its supporters, in four-year cycles. The last of these cycles peaked in December 2017, when it hit $19,600. A year later, it hit a low of $3,000.

The year 2021 is the fourth of the next cycle and this explains, according to its followers, the spectacular increase which, not without strong surprises, made it the most profitable investment: it reached $64,800 in April.

And while Musk’s tweet gave him a strong push to the bottom, his supporters are betting that this year he will go above $100,000, the more optimistic are talking about $250,000 or more.

Moreover, few say that this year, unlike previous ones, will be a “super cycle” that will not bring as big a collapse as the previous ones. The difference: institutional investment.

Mastercard, Bank of New York Mellon, and other companies have decided to make cryptocurrency transactions easier for their customers. In addition, large funds have invested in digital currencies.

The electronic payment company PayPal joined this wave by announcing in March a new service that would allow customers to buy products from millions of sellers around the world using cryptocurrencies such as Bitcoin, Litecoin, Ethereum or Bitcoin. Cash.

1.What is Bitcoin?

Bitcoin is a type of cryptocurrency, that is, a digital currency that can function as a medium of exchange and that its promoters use as a store of value.

It does not exist physically and is not controlled by any country. It is a virtual currency whose price is constantly changing, as happens with other currencies like the dollar or the euro.

The big difference is that the price of cryptocurrencies is much more volatile, and since there is no body that controls them, it goes up and down as the market moves.

Bitcoin can be used to purchase commodities or as an investment instrument, although it is not available in all countries.

Like all cryptocurrencies, bitcoin is used to make fast payments and avoid transaction fees.

2. How does it work?

Each bitcoin contains a code that is stored in a ‘digital wallet’ on a cell phone or computer, along with ‘private keys’.

People can send or receive bitcoins (or parts of a bitcoin) from other individuals or businesses.

In general, cryptocurrencies are based on a decentralized network of computers that has nodes spread around the world with copies of all transactions that have been made.

This network is called a ‘blockchain‘. These blocks or nodes are linked and secured using cryptography.

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When you perform a transaction, its data is saved in one block, and it is automatically replicated in the rest.

Bitcoin and each of the digital currencies work with their own algorithm, which helps manage the number of new units issued each year.

3. How do I get a bitcoin?

There are three great ways:

You can buy bitcoin (or part of the currency) using cash. Many people download apps to their phones that allow them to buy bitcoin using funds in their bank account.

You can sell things and let people pay you with bitcoin.

Or you can create them through a process called bitcoin mining with very powerful computers that run on an automatic reward system.

4. What is the origin of Bitcoin?

In early 2009, an anonymous programmer or group of programmers under the pseudonym Satoshi Nakamoto published an article referring to bitcoin as a new decentralized transaction system.

After developing the technology necessary to make bitcoin transactions possible, in 2011 the cryptocurrency code and the domains of the web pages were distributed among several members of the new community created around digital currency.

However, there is little information about the events that enabled the currency’s development, and what is available does not come from reliable sources.

Bitcoin is recognized as the first electronic money on the market and the one with the highest price on the market.

5. Why is there a boom?

The growing interest of large investors and individuals in buying bitcoin has accelerated over the past two years.

Previously, cryptocurrencies were seen as platforms used exclusively by organizations linked to international crime to conduct their illegal transactions anonymously.

Governments, central banks, economists and much of the investors have opposed a network that is not under the control and supervision of any sort of authority.

However, as big companies opened their doors there and venture capital funds invested in the currency, the rest of the investors and ordinary people began to gain confidence.

And with the development of apps to buy and sell bitcoin in minutes from the mobile phone, the adoption of cryptocurrency has intensified.

So far in 2021, the price of bitcoin has been trending upward, despite ongoing warnings from authorities that the currency is a bubble that will burst at any time.

6. What is it risky?

The main risk is that it will be a financial bubble that ends up ruining all those who have deposited their ‘real money in a virtual currency that is not backed by any institution.
Just as no one “owns Bitcoin”, neither is anyone responsible.

This is why the presidents of the central banks of the great powers constantly tell people not to invest their funds in cryptocurrencies because they will end up “losing all their money”.

Critics say it has no intrinsic value, but those who defend it say its value is determined by social consensus, as is the case with paper invoices.

One of its most fervent critics is the famous economist Nouriel Roubini, who calls bitcoin “shitcoin“.

There are also reports of scammers who prefer to trade using bitcoins or other cryptocurrencies because the payments are irreversible.

And if the company that stores bitcoin shuts down operations or suffers a cyber attack, the money will most likely disappear like a smokescreen.

There is no guarantee. Therefore, experts say, anyone who invests in bitcoin should be prepared to lose their money if something goes wrong.

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