How are bitcoins created? At first glance, the answer to this question may seem unimportant. Indeed, many prefer to discuss the financial aspect of Bitcoin, rather than its technical side. Far simpler and more attractive, this is really just the surface of the technology.
As a result, very few people seek to know more about the very nature of Bitcoin. This requires a great deal of intellectual effort. In this article, you’ll discover that knowing the technical side of bitcoin is very important. Especially if you want to achieve satisfactory financial results.
Trader or investor?
The importance of fundamentals
Most of the time, when people talk about bitcoin, they’re only talking about its price. For many, knowing whether it has gone down or up is more interesting than understanding the nature of its fundamentals. When you’re an experienced trader or speculator, this type of reasoning is perfectly understandable.
The aim is to make money on short-term fluctuations in a security. Whatever the asset. On the other hand, maintaining this same line of reasoning when it comes to investing can be detrimental.
An adage that makes perfect sense
As Benjamin Graham, author of The Intelligent Investor and former mentor to Warren Buffett, put it: “An investment is a financial operation which, after careful analysis, guarantees the capital invested and promises a satisfactory return. Transactions that do not meet these requirements are said to be speculative”.
This being the case, if we look solely at the evolution of the bitcoin price, without paying attention to the nature of its foundations, the mistakes made, and therefore the financial losses incurred, will be devastating.
A nuance that eludes us
One of the causes of all this will be FOMO. FOMO stands for Fear Of Missing Out. It represents a person who, because he or she is afraid of missing out on an opportunity, will rush headlong into an asset.
Buying at a premium when the asset has reached its peak, then selling at a loss when the price falls. In general, this phenomenon affects most newcomers to crypto investing. They think they’re traders, but they’re supposed to be investors.
To avoid this kind of mistake, you need to take the time to understand the fundamentals of bitcoin. And among them, one of the most important is how it’s created.
But to know how bitcoins are created, you first need to understand how a transaction takes place on the bitcoin network (otherwise known as its blockchain). In order to grasp the full meaning that Satoshi Nakamoto, the creator of Bitcoin, wanted to give to the very first crypto-currency in history.
Bitcoin: the transaction process
When you make a transaction on the Bitcoin network, i.e. a transfer of money between you and the person you’ve chosen, a mathematical problem, with a degree of difficulty well above the average, is imposed on you. Blocking any attempt to complete your transfer.
The system is designed to make transactions on the bitcoin blockchain as secure as possible. So if you want your money to go from point A to point B, you need to find the security code for the armored door that prevents your money from getting through.
But here’s the problem: you don’t have the computing power to find the security code. At that point, using their own computing power, someone else will step in to find the code. Once the code has been found by this person, the armored door will open and can finally be operated.
In exchange for the service rendered, you’ll pay a reward in bitcoin to the person who helped you. This is what’s known as the “Proof of Work”, and it’s this event that’s behind the creation of bitcoins.
Miners: the creators of bitcoins
The people who use their computing power to help users carry out transactions on the bitcoin network are known as miners. With bitcoin’s money supply limited to 21 million units, Satoshi Nakamoto wanted to draw an analogy with the Gold Rush, so that bitcoin would be a store of value 2.0.
To this end, when bitcoin was created in 2009, Satoshi Nakamoto incorporated a program in which, every four years, the difficulty of the security codes increases and the reward paid to miners decreases. This makes it increasingly difficult to generate bitcoin (Proof of Work). The probability of solving the security codes, and therefore of receiving a reward, is much lower than before.
This event, known as “halving”, aims to create a scarcity effect around bitcoin, which can be likened to precious metals (gold, silver, bronze, etc.). Hence the term “miner”. Today, since the birth of bitcoin, an estimated 19 million units have been created, or rather mined.
