Nigerian Guide: What is Bitcoin and how does Bitcoin work?

Nigerian Guide: What is Bitcoin, and how does Bitcoin work? – A must-read for Nigerians new in the Cryptocurrency world

Many Nigerians are now scared of carrying around their money in fear that they might get attacked or robbed in a quest for their hard-earned cash. No one fancies moving around with cash anymore when they can just tap their card and get the same adrenaline rush, followed by the same instant regret (when they overspend unknowingly).

So maybe it isn't surprising that an utterly digitized form of currency, namely cryptocurrency, is becoming more common over the place. Today, we're going to take a deep look into the world-famous Bitcoin, precisely because it's the most recognized cryptocurrency at the moment. 

So what is it that makes Bitcoin transactions different from simply shopping on Jumia with a credit card digitally? Well, as you might already know, that while regular electronic transactions still involve conventional money, the renowned Bitcoin is decentralized. Meaning that its distribution and exchange aren't controlled or regulated by a government or other authority, and the technical aspect is also very different.

Traditional currencies like the Nigerian Kobo or Naira go through a central payment processor (like your credit card company), but all Bitcoin transactions, whether you're purchasing goods or just sending Bitcoins to a friend, are processed on a broadly distributed range network of computers running special software.

So whenever a transaction happens, the network records the sender and receiver's Bitcoin addresses and the amount transferred and enters this information onto the end of a ledger or record called a "Blockchain".

Every day, every Blockchain is updated over 100 times and is sent to every verified computer that processes Bitcoin. Each transaction is then encrypted with public-key cryptography and verified by multiple points in the network to enable all computer that processes Bitcoin to use identical and correct copies of the Blockchain. It is virtually impossible to counterfeit. 

"Bitcoin Miners", Specially designed computers or other uniquely modelled processing devices, are in charge of the verification process that individuals like yourself connect to this extensive processing network.

This mining software works by grouping new transactions into blocks and can only be accepted by the other network if the block is correctly hashed. To do this, an high-powered computer is required to accurately find numerical values, which are time-consuming and can be an intense process to embark upon.

But what's in it for the members of the processing network? Well, once a computer successfully processes a block, it is subsequently added to the Blockchain, and the system generates a new Bitcoin that goes straight into the miner's digital wallet as a reward. So your computer ends up making money for you, from the comfort of your home, out of nothing! Awesome right?

So you're wowed and interested in mining Bitcoin as well, so you can never work again? Well, sorry to burst your bubble, Bitcoin mining is a bit more complicated than that. It takes a lot of processing power to generate an appreciable amount of Bitcoin. And since the system is designed to take about 10 minutes to successfully process a block, the difficulty of mining generally increases as more nodes join the network. Not to mention that the cost of entry are relatively high.

In the early days, you could mine on your spare laptop, then for a while, high-end graphics cards were popular choices (thanks to their highly-parallelized number-crunching optimized architectures). Nowadays (though it should be noted that this doesn't necessarily apply to other cryptocurrencies), Bitcoin can only be profitably mined using specialized mining appliances.

Unlike graphics cards, these appliances can only be used for Bitcoin mining (in most cases), and they can cost millions of naira each. Oh yeah! And they consume incredibly high power, which due to the high electricity rates in many parts of Nigeria can kill any chance of profitability for the average person.

So it's obvious why people are mining Bitcoin. I mean, there's profit to be made, right? But why do other people simply just want it? Well, some people are mistrustful of banks, financial institutions, and governments to keep their money secure but have a lot more faith in Bitcoin's redundant Blockchain system. Especially as more and more retailers begin to accept Bitcoin as a form of payment.

While others, like the partial anonymity that Bitcoin offers.

The only thing that necessarily ties you to a particular Bitcoin address is an encryption key. Plus, you could grab a new address for each transaction you make. Many Nigerians paid VPN services with Bitcoin during the Twitter ban by the Federal Government of Nigeria to stay incognito online.

Still, many Nigerians are of the notion that Bitcoin is simply an investment and nothing more. Though we advise you to tread carefully here. Because Bitcoin is entirely unregulated, there's no guarantee of its value (not even a flimsy one). So investing lots of money in Bitcoin (at least for now) is considered "speculative level risk". So do more research before buying at any period. 

Websites like "CoinMarketCap", "CoinGecko", and "CoinTelegraph" can quickly help you track live prices, crypto charts, market cap, trading volume and generally give you a fundamental analysis of the crypto market. They also provide accurate information on rapidly growing crypto assets, trustworthy solutions to help you invest confidently, and unbiased, high-quality news of the cryptocurrency market.

However, the Bitcoin system was designed so that by the year 2140, no new Bitcoins will be produced, leading some to believe that – down the line, it'll be a more secure virtual commodity of sorts that will provide a hedge against inflation of traditional currencies like the NGN (Nigerian Naira). Kind of like how some people across the Northern part of Nigeria invest in gold bars for the same reason.

It's imperative to know that, while watching the price of Bitcoin spike suddenly can be thrilling (if you've got some in your digital wallet), we'd ask that you don't take out a second mortgage on your home just to get in on the craziest cryptocurrency.

Note: The price of 1 Bitcoin as of November 2020 was ₦5.34 million, but in November 2021, it reached an all-time high of ₦25.46 million. All that in one year.

Well, that's it for our daily spice of cryptocurrency. Don't forget to share this piece with your friends and family to enlighten them. Thanks for reading!