Introduction to Cryptocurrencies: what is bitcoin and how to earn money on it

A short excursion of 8 points. We figure out what bitcoin is, how it is mined and whether it is possible to earn money on it.

A bit of terminology

The concept of "bitcoin" is closely related to a whole series of related concepts, and at least three of them should be analyzed before we go directly to the topic of the article.

Cryptocurrencies

Cryptocurrency means a type of digital money that is completely controlled by an automated decentralized system due to the blockchain network. All transactions with this currency are encrypted. This type of currency does not have a material base that underpins its value. 

Decentralized finance

DeFi, or decentralized finance, are financial systems that, unlike their classic counterparts, are not governed by external bodies. All transactions and other digital currency transactions are controlled by software code.

Blockchain

It is a programmatically linked list, each element of which contains a unique hash sum as well as the hash sum of the previous block. Blockchain allows you to store distributed data on a large number of devices, creating a single network of information blocks, the authenticity of which cannot be disputed, as well as the information inside them. Thanks to her, independence from supervisory authorities and protection from any external influence is formed. 

1. How does the Bitcoin network work?

Bitcoin is based on the blockchain. It is a gigantic block structure, distributed across servers and personal computers of users all over the planet. The last block stores information about all cryptocurrency transactions that have ever been carried out. It includes the amount, date and time of payment, who received the currency, who sold it, etc. 

This is something in the spirit of a global digital ledger. This ledger is not owned by any member of the blockchain network, which makes the system itself completely independent. 

And although everyone can make changes to the block, any change requires confirmation from the majority of investors. It is almost impossible to cheat the bitcoin encryption system. 

Bitcoins themselves are computer files that are stored in a digital wallet and used like regular money. You can buy something with them, you can make investments or just leave it as savings. 

Related: How to Create and Use a Bitcoin Core Wallet

2. Why are bitcoins so valuable?

Because people decided so. In general, it is worth looking at the financial system as a whole. Previously, the necessary things, products, goods were used for payment. Then precious materials like gold or diamonds. The Aztecs generally had cocoa beans as their currency. 

Now people already use simulacra, not real money. We print papers and use them as means to achieve some goals. Food, entertainment, transportation and other delights of life are tied to paper and metal coins. 

Bitcoin is the same simulacrum, but in an even more progressive form. As digital files. You can exchange bitcoins for money right now or buy something for them in the online store. This is just a new means of calculation, and it does not need some kind of material reinforcement for this. 

Some users value Bitcoin for its decentralization: coins are not controlled by states and banks, and no one tracks transactions. And someone just loves to invest - bitcoin costs a lot of money and brings in even more money from year to year. This is one of the most profitable investments at the moment.

3. Is it safe to use bitcoins?

The system itself is complex, but at the same time publicly available, so it is impossible to copy bitcoin or create a fake version of it (they will not be of any value). All transactions are encrypted and verified by thousands of computers around the planet. 

At the same time, Bitcoin has several disadvantages that confuse potential investors:

• People have forgotten or lost passwords from their digital wallets more than once. If there is no password, then there is no wallet. All coins disappear into oblivion.
• Fraudsters regularly create fake currency exchange pages and use phishing techniques to lure cryptocurrency away from users.
• Sometimes bitcoin is in a fever, and on crypto exchanges, its performance is noticeably reduced, but this is true for almost any securities, crypto and real currencies.

It is worth noting that people in India do not like bitcoin, and the authorities regularly raise the issue of adopting a bill that would block the bank accounts of clients who exchange funds for digital money of any kind.

4. Where can I get bitcoins?

There are three key ways to get Bitcoins (like most other cryptocurrencies):

1. Buy them. That is, exchange dollars or rupees for bitcoins. This can be done on special exchanges like Coinbase, Binance and their counterparts.
2. Exchange for goods. If you are selling something, you can create a crypto wallet and use it as one of the payment methods along with Visa and cash.
3. You can get bitcoins yourself - using mining. 

5. What is mining?

Mining is passive participation in the work of the blockchain system, which allows it to function normally. 

You literally sacrifice the performance of your PC to help process transactions for other users. For this, you receive a reward in the form of bitcoins.

But sometimes very difficult tasks arise. When there are many transactions, the blocks get confused and need to be distributed in a single chain in the correct chronological order. To solve these problems, a lot of computing power is required. Therefore, people go crazy and buy hundreds of top-end video cards to make their computers faster and mine more cryptocurrency. 

Now even very powerful devices will take years to mine at least half a bitcoin, so the mining hysteria subsided. There are only large "farms" left, which can somehow still cover the cost of electricity by mining digital coins.

There have been cases when full-fledged research institutes and other institutions with powerful computers were turned into such farms. 

6. Where to spend your bitcoins?

Usually, bitcoins are spent where they buy - on exchanges. That is, they wait for the growth of profits, and then again exchange the coins for real money.

But more and more stores and trading platforms are appearing on the network where bitcoins are accepted. You can buy both real goods and digital ones. And we are not talking about some kind of illegal activity, but about quite typical applications, services, plugins, gadgets. In addition, you can buy something from another crypto investor, since many of them began to provide services for bitcoins. Also, some organizations accept cryptocurrencies as donations.

7. How to make money with bitcoins?

There are two ways - either you invest or you mine the currency. 

In the first case, there is nothing fundamentally different from the usual contribution to currency or securities. Go to the exchange, find bitcoin there, create a wallet and buy a certain amount of virtual money. Then you wait for the rate to rise and sell. 

In the second case, the cost of electricity will be high and may not even be recouped by the mined bitcoins. Therefore, all that remains is to invest.

Or not worth it?

8. Should you invest in bitcoins?

Depends on your attitude towards investments and the amount of money in the bank account. If your income is over 300,000 rupees a month and you can afford to leave some of them in the bank, then try to buy some grain of bitcoin (a whole coin will cost 4.5+ million rupees). If he shows growth - get rich, if he does not show - you will not lose much.

The trend since the appearance of the coin shows that cryptocurrencies are not planning to go anywhere. They are popularized, promoted by celebrities like Elon Musk. Doubting the prospects of this direction, as was customary among skeptics 5 years ago, no longer seems such a reasonable decision. More and more people regret missed opportunities. 

Again, it is prohibited to use cryptocurrency in India. You will only be able to buy something abroad. But you cannot sell services for bitcoins within the India. We also consider cryptocurrencies to be property, and you will have to pay personal income tax for this property. 

Instead of a conclusion

Cryptocurrencies in general and bitcoin in particular are a fast-growing alternative to real money, gradually covering more and more spheres of life and attracting more and more investors from all over the planet. Safe, expensive, volatile and prohibited in India. It is worth using (within the limits of the law) if you have money. And you can only make money if you have the proper investment skills.

Related: What is blockchain in simple words and how does this technology work