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Importance of bitcoin from an economic perspective


1st Jun 2021 Managing your Money

Importance of bitcoin from an economic perspective

Bitcoin is a cryptocurrency launched in 2009. It was created as open software. Bitcoin is created by a person (or group of persons) called Satoshi Nakamoto. He published a paper about bitcoin in 2008. The paper was entitled Bitcoin: A p2p electronic cash system.

All bitcoin transactions are verified, and it is recorded in the blockchain. A Blockchain can be considered as a public ledger. People can purchase BTC via an online exchange. These exchanges help people to convert other currency into bitcoin. Bitcoin Market is an example of such an exchange. It was opened in 2010. Another important exchange is MtGox. The market cap of bitcoin surpassed $1 bn in 2013. 

The users involved in bitcoin transactions will remain anonymous. Transactions will be recorded in the blockchain. The only public address of users will be available in the blockchain. Public addresses do not contain any personal information of the user. This anonymous character made BTC the favorite choice of users. For Bitcoin transactions, the public key of the user should be given. Users should also enter the amount of BTC he/she likes to transfer. Bitcoin address will be associated with a private key. It will be the password, and it ensures that BTC transactions are authorized. This private key will be secured, and it will help the users to sign transactions digitally.

Bitcoin mining

When transactions are broadcasted into the BTC network, miners will collect them into groups. Each group is called a block. These blocks will be added to the public ledger, known as the blockchain. A hash that is based on these transactions will accompany each block. Block is also accompanied by the nonce. Miner's main aim is to find nonce. Hash should meet the system requirements. The computation of hash is difficult. But it can be easily verified using hash functions. The successful miner who finds a suitable hash will broadcast the block into the BTC network. Miners will get newly created BTC as a reward. To control the rate of bitcoin creation, the difficulty of Bitcoin mining is adjusted. It is adjusted every 14 days so that the rate of mining is one in every 10 minutes. 

Two main purposes of bitcoin mining are to avoid double-spending and controlled the creation of new BTC. The main concept of mining is the hash function. It maps numbers or text into a string of fixed length called a hash. We cannot infer the original content of a hash. But by applying the hash function, we can determine if a hash is correct or not. A miner can only find nonce by the method of brute force computation. Brute force computation is a trial and error method. 

Verification and addition of blocks to blockchain helps the bitcoin network to maintain its integrity. The number of awarded BTC began at fifty Bitcoins. It gets halved after 210,000 blocks. This will lead to a reduction in the number of newly created Bitcoins. The maximum number of bitcoin is 21 million. The incentive of miners is based on its value. When the price of BTC increases, users will get more profit through bitcoin mining. There will be many miners who work for adding blocks to the blockchain. But only one among them will succeed in it. Mining pools are formed to overcome this problem. Mining pools are a group of miners. They will distribute rewards among all of them. 

To control the bitcoin creation, the difficulty of bitcoin mining will be adjusted after the 2016 blocks. This is to ensure that six blocks will be mined every hour. Difficulty can be adjusted by changing the computer power level. When more miners enter into the network or available miners dedicate more time for computing, the rate of mining will become faster. From websites like bitcoin evolutionwe get more information about bitcoin mining.

Calculating costs

The main expenditure of bitcoin mining is the consumption of electricity. Machines used in mining consume electricity. Money is needed to purchase equipment.

Revenue estimates

Revenue from bitcoin mining is newly created BTC. Bitcoin, which users get as a transaction fee, is also a source of revenue.

Profit from mining

The cost of electricity used for Bitcoin mining is negligible when compared to the price users get from selling a bitcoin through an exchange. 

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