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How Bitcoin Works

Date Modified: 06/08/2023

Since its inception in 2009, Bitcoin has probably become one of the most popular cryptocurrencies out there. It is not only considered the father of digital coins, but also one of the most traded cryptocurrencies with an astounding market cap. Bitcoin’s ubiquity speaks for itself, but how does it work exactly?

Bitcoin is a form of digital currency that can be used to pay for goods and services anywhere that it is accepted. This is similar to how fiat currencies, such as the US Dollar (USD/JPY), British Pound (GBP/USD), Euro (EUR/GBP), and others are used for trade.

However, instead of being monitored by a central bank to certify authenticity and legitimacy, Bitcoin relies on a decentralized system. This means that no central system controls the currency. Rather, a collective of independent individuals offer their own computing power (nodes) to monitor, review, and approve transactions.

The Purpose Behind Bitcoin’s Creation

The main purpose behind Bitcoin was to act as a way for people to transact money over the internet without having to have a third party involved in that transaction. In other words, unlike traditional bank transactions, Bitcoin was created with the intention of it serving as an alternative payment system that operates free of control (decentralized) through the use of blockchain technology.

What is Blockchain Technology and How Does It Work?

Blockchain or Distributed Ledger Technology refers to the format followed by many cryptocurrencies to verify that a payee is the legitimate owner of the coin through decentralization and cryptographic hashing. It does this by keeping a ledger (a record-keeping system) of each coin’s movements when being passed to the new owner. Approving each transaction also ensures that movements are in line with the network’s protocols.

All independent nodes (network stakeholders) have access to ledgers that hold information as to who owns the coin at any given time and can confirm the legality of each block. Each transaction or packet of data is referred to as a ‘block’ and the ledger can link them all together in chronological order. This is how the ‘blockchain’ became synonymous with Bitcoin, since it uses blockchain methodologies to keep the system transparent and honest.

Phone with Bitcoin trading screen on the Plus500 platform.

Illustrative prices.

How to trade Bitcoin

Many traders enjoy trading cryptocurrencies, including Bitcoin because they are volatile instruments that are subject to unpredictable swings. Long-term traders may prefer to purchase the underlying asset, hoping the value grows over time, while others prefer to trade Contracts for Difference (CFDs). Each method allows traders access to the crypto market in its own way.

Owning Bitcoin

Like owning gold, silver, or any other potential store of value, the owner is speculating that in the future, the price of the item will rise.

Owners of Bitcoin are exposed to long-term risk by lacking historical data to predict if their coin will hold value in the future. In addition, they need to store their digital currency in an acceptable digital wallet. Once they want to make a purchase or sell their coin, they will need to go to the open market and ensure that they have the proper password for their wallet.

Bitcoin CFDs

With Bitcoin CFDs, traders do not need to own the underlying asset. Rather, they can use a trading platform like Plus500 to open a position against Bitcoin’s price movements by opening long or short positions. When trading with Plus500, traders can open leveraged positions, gaining greater exposure to the instrument without paying commission.

For example, if a trader believes that the price of Bitcoin is going to rise, they can open a ‘Buy’ position with a Bitcoin CFD. While they will not own any Bitcoin from this transaction, they can still profit off of the coin’s movement, should the price go higher than the value at which the position was opened. At the same time, if the value of Bitcoin drops below the value at which the position was opened, they will have a loss.

On the other hand, if they believe that the value of Bitcoin will drop, they can benefit from this too. By opening a ‘Sell’ position, they can potentially profit from Bitcon’s negative price movements. For example, if you open a Bitcoin CFD Sell position while Bitcoin is valued at $16,000 and the price drops to $15,900, you can close the position, without needing to find a buyer, and profit $100. At the same time, if you open a Sell position for the same amount but close it when the price rises to $16,100, then you would lose $100.

Word Cloud1 with Bitcoin-related terms.

Bitcoin Trading Information

Traders who trade Bitcoin with Plus500 and other cryptocurrencies can do so 24 hours a day.

Having continuous access to the real-time price for this digital coin ensures that traders can confidently open and close positions without worrying about digital wallets or a lack of buyers in the market.

While many digital currencies, such as Ethereum have risen to popularity since the minting of Bitcoin, none have reached its relatively high valuation or rate of adoption. The short history of Bitcoin is full of speculation, rapid highs, and deep lows. Traders should be aware of the volatile nature of all cryptocurrencies and remain vigilant to the price movements for their open trades.

*Subject to operator availability.

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