We also explained how you can store bitcoin in bitcoin wallets, buy bitcoin from cryptocurrency exchanges, and spend bitcoin in the real world using bitcoin debit cards and other payment solutions.
In today’s lesson, we’ll explain all of the following:
- The value behind Bitcoin, including how supply and demand control bitcoin’s price.
- How Bitcoin prices can be sharply influenced by news and events.
- Why Bitcoin has a fixed supply of 21 million total units — and how that affects price.
- A Bitcoin transaction is a transfer of value using the bitcoin network
- Bitcoin transaction information isn’t encrypted.
- Anyone can view a bitcoin transaction using a blockchain explorer.
- Transactions must be verified by miners on the blockchain network.
- Miners receive bitcoin rewards in exchange for verifying transactions.
Bitcoin’s Value Supply And Demand
Many people have the mistaken idea that the price of bitcoin is “backed by nothing”. That’s just not true. Bitcoin’s price is governed by two crucial factors: supply and demand.
Bitcoin’s supply and demand, meanwhile, are based on the technological innovation behind bitcoin, its usability, and its value when purchasing real-world goods and services.
Supply and demand is easy to understand. Let’s say someone has 1 BTC and they want to sell it. Due to increased demand, two buyers are interested in buying that 1 BTC — but there’s still only one seller.
One buyer offers to buy the 1 BTC for $1,000. Another buyer offers $1,001. The seller always takes the higher offer. This is the basic concept of supply and demand.
How News Can Affect
Bitcoin’s price can be affected by a number of different things. Typically, news from the cryptocurrency industry can send the price of bitcoin soaring or plummeting. Common news stories online include:
- A country like China just announced new regulations regarding bitcoin and cryptocurrencies
- A country announced a bitcoin ban
- Regulators raided a major cryptocurrency exchange
- Developers announced a bitcoin hard fork or another major technological shift
- A retailer like Amazon announced it was accepting bitcoin as a payment method effective immediately
- A cryptocurrency exchange was just hacked, leading to the loss of thousands of BTC
All of these news events can have a significant effect on the price of bitcoin.
Some news events send the price soaring — say, when a major retailer announces plans to support or accept bitcoin.
Other news events send the price plummeting — say, when China banned bitcoin and crypto exchanges in September 2017 or when Mt. Gox, the world’s largest bitcoin exchange at the time, was hacked in 2014 and lost $500 million in bitcoin.
One of the crazy things about bitcoin — especially to traditional financial traders — is that cryptocurrency markets never close. You can buy and sell bitcoin at any time of the day or night.
Major news can break at midnight on a Saturday night or 6am on a Friday morning. You might leave work with bitcoin priced at $5,000 on Friday afternoon only to find it at $10,000 by the time you get back to work on Monday.
Bitcoin’s Fixed Supply
Bitcoin has a fixed supply of 21 million. There can never be more than 21 million bitcoins in circulation.
As of 2018, approximately 17 million bitcoins have been mined, which means there are only 4 million bitcoins remaining to be mined. Of those 17 million, anywhere from 2 to 4 million have been “lost” because users have lost or destroyed their private keys.
Unlike the USD, we can’t just print more bitcoin when demand rises. Central banks worldwide often want to keep their currency at a stable exchange rate.
That’s why they’ll print money to keep a steady rate of inflation. If the Bank of England suddenly stopped printing GBP, for example, the value of the GBP could dramatically rise. Demand continues to grow, but supply stays steady, leading to an increasing price.
This is one reason why the price of bitcoin has steadily increased over time. There’s been a steadily growing demand and awareness of bitcoin — but the total supply of bitcoins has never changed, nor will it ever change.
This is why bitcoin is called a “deflationary” currency while the USD and most fiat currencies are inflationary.
To put this concept into perspective, consider this: between December 2008 and October 2014, the US Federal Reserve added $4 trillion USD to the money supply.
Bitcoin, meanwhile, has remained steady at a fixed supply of 21 million. 12.5 BTC are mined every 10 minutes as a block reward and added to the circulating supply, although the total supply of BTC never changes.
The combination of steady supply and increasing demand leads to a predictable result: the price of bitcoin grows over time.
As long as demand for bitcoin continues to increase, the price should continue rising.
The bitcoin blockchain is a public ledger on which every bitcoin transaction is recorded. Every bitcoin transaction in the history of bitcoin can be found on that ledger — from the very first bitcoin transaction to mysterious transfers of $100 million. It’s all view able for anyone to see.
The blockchain is maintained by a network of nodes. Nodes are computers connected together across the bitcoin network. Each computer runs the bitcoin software.
These nodes create the decentralized network behind bitcoin. No single node is worth more than any other node. It’s a decentralized, democratic system outside the control of any centralized authority.
Let’s say you want to send bitcoin to someone. You open your bitcoin wallet, enter your recipient’s wallet address, and authorize the transfer.
At this point, your transaction is sent to the bitcoin network where it will be validated by the network of nodes. Valid transactions are added to their individual copy of the ledger, and each computer broadcasts their version of the ledger to other nodes on the network.
These nodes create a “consensus” — they reach an agreement on the “true” version of the bitcoin blockchain. Then, a block of transactions is added to the chain — hence the name blockchain.
Once a transaction is processed and verified by the bitcoin network, the private keys for that particular bitcoin are transferred to the recipient’s wallet.
To be clear, you don’t ever actually “hold” your bitcoins. Instead, you own bitcoin because there’s a verifiable chain of transactions proving your ownership of that bitcoin.
The reason you “own” your bitcoin is because the last transaction of that specific bitcoin was traced to your wallet address. Your private key proves ownership, and you hold that bitcoin for as long as you own the private key.
Anyone can check bitcoin’s transaction history using a blockchain explorer. A blockchain explorer is like a search engine for a blockchain. You can search for specific wallet addresses or transactions. All of this transaction information is publicly view able.
Nodes Compete For A Block Reward
So you’ve sent a bitcoin transaction to the bitcoin network. Next, the nodes on the network will compete with one another to verify that transaction.
The first node to successfully solve that transaction will receive a block reward in the form of bitcoins.
Nodes receive bitcoins in exchange for their work validating transactions and maintaining accurate records across the bitcoin network.
Once the node has verified the transaction, your recipient’s wallet will display the received bitcoins, and your wallet will no longer display your own bitcoins. The node that processed your transaction will receive a reward in the form of bitcoins.
In tomorrow’s lesson, we’ll get to something more exciting: how you can start earning bitcoins for yourself — including how to buy bitcoins or how to earn bitcoins by mining with your computer.
Made by masterthecrypto and shared with you. See you in the next lesson! With love 💛 Rubika Ventures Team!
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Remember, investment in cryptocurrencies or other assets has a moderate risk, so it is important to have a detailed study of the possible scenarios before placing your money at risk.