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BITCOIN EDUCATION

What is Bitcoin: The first successful application of blockchain technology

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WHAT IS BITCOIN

Bitcoin

Bitcoin (Bitcoin) is undoubtedly one of the hottest topics in recent years. Is it the inevitable trend of currency development in the future, or is it another “tulip bulb” of crazy hype?

First of all, Bitcoin is not any tangible currency. Its production and operation are based on the Internet. It is an open-source form of P2P (Peer to Peer) digital “currency”. Different from the early gold and silver currency chose by humans due to its natural attributes, and different from the fiat money (Fiat Money) that people have been accustomed to in the past 100 years-paper money supported by national laws and sovereign credit, Bitcoin was born entirely from the modern technological Internet era.

Bitcoin is the first successful application of blockchain technology. The transaction records of the traditional financial system are stored in the database of the bank center, while the blockchain is the Bitcoin ledger. The ownership and transaction records of Bitcoin generated at any time are recorded in the blockchain ledger. Anyone who downloads the client can receive relevant information.

Bitcoin addresses and private keys are similar to personal accounts and payment passwords. The bitcoin owned by an individual is locked on a personal address, and only by using the private key can it be unlocked and sent to another address for transactions. During the transaction, a bill will be sent to the entire network, and other users will verify it. Once verified, the transaction is successful. The first user who verifies whether the transaction is valid will be rewarded with a bitcoin. This reward of bitcoin is divided into two parts: one part is the transaction fee, which is paid by the transferor and is the bitcoin that already exists in the system; the other part is the newly generated bitcoin reward in the system. The greater the computing power of the computer, the more likely it is to receive Bitcoin rewards. The so-called “miners” are people who specialize in verifying transaction information and updating records.

In general, Bitcoin has the following characteristics:

The total amount is limited, and the issuance will not get out of control. The only source of Bitcoin issuance is the basic rewards of the system after successful accounting. The basic reward is 50 bitcoins at the beginning, and the reward will be halved after every 210,000 blocks created. So far, the halving has occurred twice, and successful accounting will only get 12.5 bitcoins. It is estimated that by around 2140, the total number of bitcoins will reach the upper limit of 21 million.

Good anonymity, the identity of the account owner will not be known by anyone. People can conduct transfer transactions through Bitcoin at will, without the need to verify various identity information like bank transfers, let alone bind with any bank card. However, this feature also makes Bitcoin widely used in illegal transactions such as money laundering. At present, the main purpose of Bitcoin payment is black market transactions and “dark web” transactions.

The production and maintenance of Bitcoin consume a lot of energy. “Mining” makes every new bitcoin produced to solve complex mathematical problems through a high-performance computer to perform an encryption process. Since the amount of currency obtained by mining is directly proportional to the computing power of the machine, from a probability point of view, the higher the performance of hardware, the higher the proportion of computing power among all miners, and the easier it is to obtain Bitcoin. To obtain higher profits, “miners” are competing with each other in computing power. The total computing power of the world’s 10 largest mining pools accounts for 75% of Bitcoin’s computing power. The computing power is highly concentrated and maintained. Decentralized accounts require a lot of energy.

 

How does Bitcoin work?

Bitcoin relies on two basic mechanisms to operate-the blockchain and the mining process.

What is blockchain?

Blockchain is a shared digital ledger that contains records of all Bitcoin transactions. The recent cryptocurrency transactions are combined into “blocks” by miners. Before linking to the existing blockchain, these blocks will be encrypted and protected. The blockchain can be accessed at any time, but can only be changed through the computing power of most networks.

What is mining?

Mining is the process of fixing each block to the existing blockchain. Once a block is fixed, a new cryptocurrency unit called “block reward” is released. Miners can inject these units directly into the market.

What factors affect the price of Bitcoin?

Bitcoin’s volatility is driven by many factors, including:

  • If the software of different miners becomes misaligned, there may be splits or “forks” in the blockchain. This leads to the existence of two different blockchains. It depends on which version the miner network agrees to continue to use. The fork led to the creation of variants such as Bitcoin Cash and Bitcoin Gold. Learn more about forks
  • Regulation: Bitcoin is currently not regulated by the government and central bank. There are questions about how it might change in the next few years and how it will affect its value.
  • Supply: The number of Bitcoins may be limited (21 million), and it is expected to be mined by 2040. Also, availability fluctuates based on how quickly they enter the market.
  • News: Prices may be affected by public perception, safety, and longevity.

Adoption:

At present, it has not been widely adopted as a payment method by enterprises or consumers. However, some people see the potential of blockchain technology and believe that it may be more widely adopted in the future.

What is “Bitcoin Halving”?

The Bitcoin network can only generate 21 million Bitcoin blocks. Bitcoin is obtained through mining, and miners receive Bitcoin as a mining reward. When the halving event occurs, miners will receive a 50% reduction in the number of bitcoin rewards for completing the same workload.

The purpose of the halving is to regulate supply and demand, that is, as the supply decreases, the demand will increase, and the value of each bitcoin usually rises.

What impact will the halving event have on the price of Bitcoin?

From historical data, after the halving event, the price of Bitcoin against the US dollar has appreciated. For example, after the 2012 halving event, the price of BTC/USD soared from around US$11 to over US$1,000 within a year, an increase of 80 times. After the 2016 halving event, the price of Bitcoin rose again. BTC stayed in the price range of 580-700 USD for several months, until it slowly rose to 900 USD at the end of the year.

Nevertheless, it is worth noting that the market demand for Bitcoin may fluctuate sharply, and the market environment will be different every time the halving occurs. This means that we cannot simply use the halving event as a criterion for predicting bull or bear markets.

Some analysts believe that the expected May halving event occurred during the global recession, which may lead to increased demand. However, you must bear in mind that, given the unprecedented global crisis currently experienced, these views are only speculations.

How often does the Bitcoin halving happen?

Bitcoin stipulates that after every 210,000 blocks are generated, a block halving event will occur, which occurs on average every 4 years. So far, we have witnessed 2 halving events: the first halving occurred in November 2012, and miners halved from 50 bitcoins mined every 10 minutes to 25 bitcoins every 10 minutes. The second halving took place in July 2016, after which miners mine 12.5 new bitcoins every 10 minutes. It is expected that the halving event in May 2020 will reduce the number of bitcoins mined every 10 minutes to 6.25.

Pros and cons of Bitcoin halving:

In terms of nominal value, the halving may be seen as a negative event, especially for Bitcoin miners. However, the halving event may have a positive impact on investors and traders.

Since the price of Bitcoin increases after each halving, Bitcoin owners will benefit from the increase in asset value.

Due to the reduced supply, the demand for Bitcoin in the halving event is often a good thing, and demand is usually seen as the main factor driving the future price increase of Bitcoin and other altcoins.

However, traders must also be aware of the possible negative effects of the Bitcoin halving. Some analysts predict that the halving may cause losses to other altcoins. After the Bitcoin bull market in 2019, many smaller altcoins suffered losses as altcoin investors turned to Bitcoin.

Due to the sudden doubling of mining costs, miners may sell their reward bitcoins, and bitcoin may therefore face a huge risk of collapse.

Bitcoin halving is often accompanied by price fluctuations, which may be positive or negative. Usually, price fluctuations increase before and after the halving event. Traders can use volatility to profit. However, severe price fluctuations may also make the pricing model elusive, thereby affecting the execution of trading strategies.

How can I trade with Bitcoin halving?

All previous halving events have caused the price of Bitcoin to rise. The first halving pushed the price of Bitcoin from $11 to $1100, and the second halving increased the price of Bitcoin from $600 to $20,000 in 18 months. However, the environment for each halving is different, and the demand for Bitcoin may fluctuate sharply, especially during the current pandemic. Facts have proved that even for the most “stable” assets, this is an economic test.

Some people believe that Bitcoin may have the same development trend as stocks and other assets, that is, investors will realize the assets they hold. But other people predict that under the combined influence of market chaos and the halving event, the price of Bitcoin may exceed  2017 high and rise to $20,000.

From the figure below, you will understand the direct impact of the historical halving event on the price of BTC/USD:

 

How can I profit from the Bitcoin halving?

The purchase price of a Bitcoin is already quite expensive. If you choose to buy Bitcoin, once the price plummets, you will suffer huge losses. Another way to participate in Bitcoin transactions is to buy and sell Bitcoin CFDs, which means that you can profit from price changes without having to directly purchase assets. Depending on your judgment of trading the trend, you can also wait until after halving the incident buy open BTC / USD or sell position. Besides, CFD trading allows you to have profit opportunities in rising or falling markets. If you think the price of Bitcoin will fall, you can open a sell position. Conversely, if you think the price will rise, you can buy low and sell high.

How do I manage the risk of Bitcoin trading?

You can manage risk in a variety of ways, including limiting the capital invested in each transaction. Depending on your trading strategy, the investment ratio can be 10%, 5%, or lower.

You can also use risk management tools, such as the stop loss and profit closing tools provided by the Plus500 platform. The stop loss tool will close your trade when the value of the asset drops to or exceeds the specified price. Profit closing can close the position when the specified price is reached, thus helping you lock in profit. Besides, you can also use the guaranteed stop-loss tool, which will ensure that your position is closed at the exact price specified, which is a fee-based tool.

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