Litecoin News

LTC/USD is likely to break above $200 and target recent highs near $250

Litecoin (LTC) has spiked by more than 11% in the past 24 hours, reaching intraday highs of $196. The LTC/USD pair is bouncing higher a day after it was revealed that Grayscale Investments purchased 174,000 LTC in February.

As per the data, the purchase accounted for nearly 80% of all mined LTC in the month. Grayscale Litecoin Trust has increased its holdings in assets under management to $244.5 million worth of LTC.

The fundamental signal has added to an improving technical picture, with the short-term move likely to see Litecoin’s price break above $200 again. If it does, bulls could target highs near $250. On the contrary, a strong rejection could send prices plummeting towards $176.

Litecoin price outlook

LTC/USD has traded higher on the day as bulls push for more gains after breaking above the 50-day simple moving average at $176. The upside also includes a break above the horizontal resistance line at $181 and $189, the latter hurdle marked by the 0.382 Fibonacci retracement level of the decline from $247 to lows of $153.

At the moment, bulls are battling selling pressure near the 100 SMA ($198), which is also flanked by the 0.5 Fib level ($200). If buyers make it above these hurdles, they are likely to reclaim $211 (0.618 Fib level) and $227 (0.786 Fib level).

The 4-hour chart has the MACD line looking to increase above the signal line. The RSI is also seeking an upward flip above 60, which could accelerate LTC’s uptrend if bulls take over fully. A fresh rally above $200 will therefore push LTC/USD towards $250, with short-term targets extending to $280 and $300.

On the downside, failure to take charge above $200 will expose bulls to renewed bearish pressure. If this scenario unfolds, a significant drop would see LTC prices retreat towards the main support area near $175.

Here we have the 50 SMA located at $176 and the 0.236 Fibonacci retracement level currently just below at $175. The horizontal line near $171 provides the next bearish target, with any more losses likely to extend LTC prices towards $150.

Grayscale buys 174,000 Litecoin: LTC price swings 11% on news

If LTC resumes upside and breaks above resistance near $238, a breakout above another key resistance zone could see bulls attack $300 or higher

Litecoin (LTC) is looking to bounce off support at $230 and target short-term resistance at $238. This follows a dip to lows of $220, which came after bears rejected bullish advances at the aforementioned zone. LTC is likely to bounce higher given the technical picture on the daily and 4-hour charts.

At the time of writing, Litecoin is trading at $234, slightly up over the past 24 hours by around 2.5%. The cryptocurrency, currently ranked 8th by market cap, is however stronger over the week as it remains 27% in the green zone.

Litecoin price upside picture

Litecoin price broke above resistance at $229 after its rejection near $240 sent it tumbling to $220. A clear break above the immediate resistance zone at $239 will likely see the LTC/USD pair move towards a three-year high. Beyond that, bulls will target the all-time high of $375.

The daily RSI and MACD suggest bulls have room to maneuver to the above targets.

As the daily chart shows, the horizontal resistance line around $239 is the main hurdle before a potential retest of $273, a price level marked by the 0.618 Fibonacci retracement level of the move from $375 peak to $25 low.

If bulls succeed in breaching that barrier, the next target could be the psychological $300 and then the 0.786 Fibonacci retracement level ($340). Achieving this milestone would put $375 into focus, which is Litecoin’s all-time high reached on 19 December, 2017.

The 4-hour chart suggests a retest of the $240 hurdle is even more likely, with LTC trading higher within a contracting rising wedge pattern.

The pair is also looking to validate a short-term bullish break from a descending trend line. A clear break to the upside could place Litecoin’s price near $246, and see bulls target the aforementioned levels on the daily log.

The 4-hour MACD is suggesting a hidden bullish divergence, while the 4-hour RSI is increasing towards the overbought territory. This is a continuation outlook that implies a stronger move is on the cards.

According to crypto analyst and trader Michael van de Poppe, Litecoin is undervalued and could surge to $450-$700 this summer.

“#Litecoin is heavily undervalued compared to #Bitcoin. That’s what you derive from the $BTC pair. Next to that an impressive amount of volume recently and strong bullish divergences. I’m expecting $LTC to run to $450-700 in May-July.”

Litecoin price downside move

A bearish reversal might surface if Litecoin price drops below support at the lower trend line of the contracting rising wedge. This will likely see LTC dip below $230 again, with the 50-day simple moving average (4-hour) providing support at $211.

Any further losses could see prices decline as low as support at $180 in the short term.

LTC/USD rose to $195 before sellers pushed it to $180

Litecoin is among several altcoins that have shone as Bitcoin has retreated from its recent all-time high. The cryptocurrency mirrored other big gainers such as Binance Coin, Cardano, and ChainLink in moving higher.

LTC price moved to highs of $195 on Wednesday before correcting the gains amid a lull in the broader market. The move represented Litecoin’s highest price level in nearly three years. The last time LTC/USD exchanged hands at the $195 level was in March 2018.

Litecoin price spiked amid network growth

At the time of writing, LTC trades at $186. It is about 3 % lower on its 24-hour opening price, but still more than 22% up over the past seven days.

This uptick in Litecoin’s price coincides with a spike in network activity, according to data shared by on-chain analytics platform Glassnode. As per the firm, active addresses have jumped to 231,973, a new high that represents the biggest growth since 5 June 2020.

There has also been a spike in new addresses, with this rising to 101,862 for its highest count since April 2019. The increase in new addresses is a key metric that suggests more investors have joined the network and are adding to the buy-side momentum.

Litecoin chart showing increase in new addresses. Source: Glassnode

Litecoin price outlook

LTC/USD

Litecoin (LTC) failed to sustain the momentum after touching the multi-year high of $195, as the previous candlestick shows. Aggression on the part of the bears appears to have fizzled out, with bulls seemingly energised after buying the dip.

Currently, extending gains above the resistance level at $186 is the main goal for bulls. That would allow them to retest 10 February intraday highs. If sellers’ stubbornness breaks, upward action will likely shoot LTC/USD past $200 and see it settle above $220.

LTC/USD daily chart. Source: TradingView

The MACD and RSI indicators give bulls the upper hand and prices above $250 offer a legitimate short term target.

Bears are, however, likely to stage another vigorous sell-off if prices reach the above levels.

If bulls fail to keep LTC/USD above $185, increased profit booking could accelerate a retreat towards the 20-day exponential moving average. The EMA offers a buffer zone at $155.

Failure to consolidate above the price level could leave a horizontal support line at $130 as the main anchor. A breakdown beyond this support line could tip LTC/USD towards $100.

“Hashrate” refers to the total combined computational power that is being used to mine and process transactions on a Proof-of-Work blockchain, such as Bitcoin and Ethereum (prior to the 2.0 upgrade).

A “hash” is a fixed-length alphanumeric code that is used to represent words, messages and data of any length. Crypto projects use a variety of different hashing algorithms to create different types of hash code – think of them like random word generators where each algorithm is a different system for generating random words.
For instance, the hash for “coindesk” using the hashing algorithm that Bitcoin uses, SHA256, = f2429204b339475a3d94dd5450f5ebb3c80130a85fbb91d62768741a3b34a6b6

Before new transactional data can be added to the next block in the chain, miners must compete using their machines to solve a difficult mathematical problem. More specifically, miners are trying to produce a hash that is lower than or equal to the numeric value of the ‘target’ hash by changing a single value called a ‘nonce’. Each time the nonce is changed, an entirely new hash is created. This is effectively like a lottery ticket system, where each new hash is a unique ticket with its own set of numbers.
For example, if we take “coindesk” and change the first letter to make “foindesk,” we get this hash = 5a12a9af1b5794bf6855c15944339d41ff713665e415b5434b8c9f081c61b66a
Since each hash created is completely random, it can take millions of guesses – or hashes – before the target is met and a miner wins the right to fill the next block. Each time that happens, a block reward of newly minted coins is given to the successful miner along with any fee payments attached to the transactions they store in the new block. 

The block reward, which is a predetermined amount of free coins given to a miner each time a new block is mined, undergoes a programmed halving in order to incrementally reduce the total supply over the course of a coin’s mining lifespan. For Bitcoin, block rewards are cut in half every 210,000 blocks, or approximately 4 years. As of 2021, miners receive 6.25 bitcoins each time they mine a new block. The next halving is expected to occur in 2024 and will see bitcoin block rewards drop to 3.125 bitcoins per block. Dash is another mineable cryptocurrency that reduces its block rewards by 7.14% every 210,240 blocks, while Litecoin halves its rewards every 840,000 blocks.

Application-specific integrated circuit (ASIC) mining hardware now dominates the crypto mining space and is solely designed to perform hashing functions. Some modern-day ASIC rigs are capable of achieving 110 tera hashes per second (TH/S), which equates to 110 trillion attempts at solving the hashing problem per second.

Miners are motivated to do all this in search of monetary rewards. In the process, though, they play a key role in securing cryptocurrencies, most famously Bitcoin, by making it more difficult (namely very expensive) for attackers to gain a 51% majority control over the blockchain network. 

Hashrate FAQs

What is Bitcoin’s current hash rate?

171 million EH/s, which stands for exa hashes per second, at the time this article was published. 1 exa hash = 1 quintillion hashes.

That means that miners are computing 171 quintillion hashes every second. Find the most current estimate at Blockchain.com.

Why is hashrate important?

Higher hashrate means more resources are being devoted to process transactions on the blockchain. This makes a network more resilient to attacks because a malicious agent would need to spend vast sums of money to outcompete other mining facilities in order to gain a 51% majority control and stop other people’s transactions, or double-spend their own coins. 

It follows, then, that the higher the hashrate, the harder it is for a bad actor to source the necessary hashing power and, as such, the harder the network is to attack. 

What is mining difficulty?

Mining “difficulty” is how difficult it is for miners to produce a hash that’s below the target hash.

In Bitcoin, the difficulty automatically adjusts every 2,016 blocks. Blocks are targeted to be found by miners every 10 minutes. So if miners are finding bitcoins more often than every 10 minutes on average, the difficulty moves upward. If miners are finding bitcoins less often than every 10 minutes on average, the difficulty moves down. 
With Ethereum, mining complexity uses a similar system to Bitcoin with the added addition of a “difficulty bomb” that was introduced back in 2015 and went live during the Homestead update in early 2016. This increases the time it takes to mine each new block with the aim of phasing out ether mining to make way for the new Proof-of-Stake (POS) mechanism in the 2.0 upgrade.

Difficulty is a key piece of calculating a hashrate. The more difficult it is to mine, the more hashes will need to be generated to find the block rewards, pushing the total hashrate higher. 

How is hashrate calculated?

There’s no way to know for sure the exact hashrate of a mineable cryptocurrency, though it can be estimated. Hashrate is traditionally estimated based on public data about the underlying cryptocurrency, including the difficulty metric described above.

Though this traditional estimation method is in the right ballpark, this methodology has long been criticized as not precisely accurate. The Kraken crypto exchange proposed another way of estimating the hash rate, using statistics to show with 95% confidence that the hashrate lies in some range. 

Why has Bitcoin’s hashrate gone up?

More and more miners have entered the fray in Bitcoin’s short history, pushing the hashrate up. 

The most likely reason for new miners joining the highly competitive space is because of bitcoin’s high price potential. An increase in demand for bitcoin (which is a scarce asset) recently pushed the price above $40,000 per coin (it is lower now, at press time), which in turn has attracted more operators who are seeking to get in on these significant returns.

Any rise in miners pushes Bitcoin’s difficulty up, which then drives the hashrate up.

Bitcoin reversed several days of sideways trading to head higher, ether broke $1,500 for the first time and DeFi’s ecosystem has a record amount of value locked in dollar terms.

Bitcoin’s price is gaining Tuesday, going as high as $35,645 around 10:00 UTC (5 a.m. ET) before dipping somewhat.

“I think we’ll see more interest in bitcoin again if we move solidly above $35,000,” said Chris Thomas, head of digital assets for Swissquote Bank. “On the support side for bitcoin is institutional buying in the low $30,000s.”

Some exhaustion recently in the bitcoin market may have been caused by speculative activity in the stock market. 

“So much attention has been on U.S. equities markets as of late, a lot of the mainstream and crypto outlets have been much less focused on driving the formation of opinions of traders and hodlers,” said John Willock, chief executive officer of crypto custody provider Tritum. 

Equities on major indexes were all up Tuesday.

In addition to the bullish sentiment keeping stocks buoyant, it should be noted the price per 1 BTC has been able to stay above $30,000 for quite a while. 

The last time bitcoin’s closing price was under $30,000, according to CoinDesk 20 data, was on New Year’s Day, when it closed at $29,333. It hasn’t looked back since.

“More than anything else, we should all take the long-term sustained price levels above the 2017 high of $20,000 now over a month as the best possible endorsement of bitcoin being a long-term bullish asset,” added Tritum’s Willock.

“Generally speaking, I think that the market is accepting higher prices while trying to digest the volatility,” noted Neil Van Huis, director of institutional trading at crypto liquidity provider Blockfills. 

Bitcoin’s gyrations seem to have subsided somewhat, helped by a very flat weekend into Monday. As of Feb. 1, bitcoin’s 30-day volatility has trended downward; but it is still above 100%, which is quite high. The S&P 500, by comparison, has a 30-day volatility below 20%.

In the options market, traders are expecting a 62% chance of BTC over $32,000, based on their positions for February expirations. They seem to expect a 53% chance of trading over $34,000 and a 44% probability of bitcoin moving higher than $36,000, according to data collected by Skew.

“We have seen good signs in the option markets that participants are still valuing and pricing the market for higher in the near term,” added Blockfills’ Van Huis.

Ether hits new price zenith, crypto locked in DeFi at all-time high

Ether (ETH), the second-largest cryptocurrency by market capitalization, jumped Tuesday, trading around $1,526 and climbing 14.4% in 24 hours as of 21:00 UTC (4:00 p.m. ET) – a fresh all-time high, according to CoinDesk 20 data.

The total value locked, or TVL, of crypto in U.S. dollar terms within decentralized finance (DeFi) is also hitting a brand-new high, going over $28 billion locked and at $28.8 billion as of press time, according to data aggregator DeFi Pulse.

The amount of ether locked in DeFI is up, at over 7.3 million ETH as of press time. The rise in the price of ether locked in DeFi doesn’t hurt.

Meanwhile, the amount of bitcoin locked is heading upward, with the TVL at 45,632 BTC as of press time.

Jun Dam, a smart-contract developer who has written code on the Ethereum and Tron platforms, noted that many decentralized exchanges have numerous pairs with ETH, and speculates traders may be selling some of their stash for DeFi tokens. “It seems like total DEX volume has increased significantly in 2021,” Dam told CoinDesk. 

“DeFi is definitely the flavor,” concurred Swissquote’s Thomas. “There’s still good value out there if you consider the possibility that more people will move to DEXs in the next 12 months [and that] arguably the DEXs are still undervalued.”

Other markets

Digital assets on the CoinDesk 20 are mostly green Tuesday. Notable winners as of 21:00 UTC (4:00 p.m. ET):

Notable losers:

Commodities:

Treasurys:

Bitcoin has been in a $30,000-$35,000 range for almost a week at a time when some market participants are seeking out ether and other crypto to trade during the perceived doldrums.

Bitcoin’s price fell Tuesday, going as low as $30,875 around 15:00 UTC (10 a.m. ET) before coming back up, changing hands around $32,003. 

The drop occurred after the world’s oldest cryptocurrency reached nearly $35,000 on Monday, noted Constantine Kogan, partner at investment firm Wave Financial, who is also bearish on current market conditions. “I expect a decline to $29,000,” he told CoinDesk. “Apparently some of the holders and whales sold off their positions.”

Kogan noted some positive news this week that didn’t move the bitcoin market much. “Marathon has invested $150 million in bitcoin and intends to become the largest miner in the world,” he said. “Crypto funds are raising records, but there was no growth at the same time.” 

The last time bitcoin was over $35,000 was almost a week ago on Jan. 20, according to CoinDesk 20 data.

“Many crypto natives and macro traders were anticipating a ~30% pullback off the all-time high from two weeks ago,” noted Brian Mosoff, chief executive officer for investment firm Ether Capital. “Now that it seems to have stabilized in the low $30,000s, traders are treating this as an opportunity to lever up and go long ahead of the next leg up.” 

Tuesday looked like a fairly priced day for long bitcoin leverage, as funding rates dipped a bit from Monday. That was a change from the excitement over the past 90 days, when margin rates could go as over 0.2% on some venues during the crazy price run-up to Jan. 10’s all-time high of $40,986.

Some are using bitcoin’s valuation relative to other cryptocurrencies as a signal for what’s ahead in the market. 

“I have a strong sentiment towards ether as a leading indicator for an upcoming alt season,” Global Digital Asset Chief Operating Officer Zachary Friedman told CoinDesk, referring to market conditions that favor “alts” or alternative cryptocurrencies. 

Friedman pointed out that bitcoin’s dominance, its share as a percentage of the total crypto market cap, is falling. Indeed, since the start of 2021, bitcoin dominance has fallen more than 10%.

“BTC dominance is dropping as profits are redistributed and ETH sitting just near its all-time high presents an immediate opportunity for new market entrants to diversify their holdings and seek additional yields,” Friedman added.

Bitcoin flows back into decentralized finance

Ether (ETH), the second-largest cryptocurrency by market capitalization, was down Tuesday trading around $1,340 and slipping 2.2% in 24 hours as of 21:00 UTC (4:00 p.m. ET).

On Monday the amount of bitcoin held in decentralized finance, or DeFi, crossed back over 40,000 BTC for the first time since mid-December. As of press time, 42,604 BTC were “locked” in DeFi, which investors do to obtain a “yield” in exchange for providing liquidity.

Ether Capital’s Mosoff says the rotation back into DeFi is simply investors chasing juicier opportunities as the market for bitcoin seems to be in a lull.

“Holders are anticipating ‘alt season’, and want to use their bitcoin to leverage additional exposure to other opportunities within the crypto space, whether it be DeFi tokens or other layer 1s such as Ethereum, Polkadot, Solana, NEAR, etc.,” Mosoff said. “Many of these projects have a lot of momentum at the moment and are well positioned for investor participation.”

Other markets

Digital assets on the CoinDesk 20 are mostly red Tuesday. Notable winners as of 21:00 UTC (4:00 p.m. ET):

Notable losers:

Equities:

Commodities:

Treasurys:

DOT, LTC and LINK could all correct lower before bulls resume their uptrend

Litecoin and ChainLink, like most other cryptocurrencies, have followed Bitcoin (BTC) into the red as markets react to potentially bearish comments by US Treasury Secretary nominee Janet Yellen.

The former Federal Reserve chair claimed during a Senate Finance committee hearing that cryptocurrencies were largely used in financing illicit activities.

The market reaction has seen BTC price dip towards lows of $32,000 on Thursday morning. In the broader crypto market, only DOT is in the green among the top ten on CoinMarketCap.

But with further downward pressure likely before markets resume their bullish momentum, DOT and other top coins are likely to witness corrective pullbacks.

Crypto price map. Source: Coin360

DOT/USD

Polkadot faces a downward correction that could see it retreat further from its recently hit all-time high of $19.32.

The DOT/USD pair has broken below the 23.6% Fibonacci retracement level ($16.56) and tested support at the 38.2% Fibonacci retracement level at $14.77. The level acted as a strong rebound zone, with prices back above the $16.00 threshold.

If bulls push higher, Polkadot price could retest resistance at intraday highs around $18.14. The main target short term is to take out the supply wall near the $19.32 high, with potential rallies to $22.00 and then $24.00.

DOT/USD daily chart. Source: TradingView

On the flipside, sinking prices below major support at $14.77 could see bulls seek to defend gains around the 50-SMA ($12.22). The weakening MACD suggests further declines towards the psychological $10.00 and 20-SMA ($8.20).

LTC/USD

A recent break below the 20-SMA ($153) line has encouraged bears, and short term loss seems to be the most likely outcome for Litecoin.

Litecoin (LTC) has dropped to around $135 at the time of writing. If bears sustain the onslaught, the 50-SMA level ($122) could provide refuge for the bulls. Bulls will need to prevent any more losses beyond $120, confirmation of which puts bears firmly in charge and opens up a path for a retest of $100 level.

LTC/USD daily chart. Source: TradingView

The negative divergence of the RSI below the 50-point and the MACD’s bearish outlook suggests shorts could have their day.

If LTC/USD corrects upwards and hits above the 20-SMA, a run to $160 could see bulls aim for recent highs around $186.

LINK/USD

ChainLink is currently looking to stem the downside correction at the 38.2% Fibonacci retracement level ($19.71). This comes after increased profit booking pushed LINK/USD below the major support line at $20.00.

If bears maintain their aggression, ChainLink’s price could likely drop to the 20-SMA support ($17.37). Here bulls could also look to the 61.8% Fibonacci retracement level of the upside from $13.23 low to $23.73 high for support ($17.23).

LINK/USD daily chart. Source: TradingView

The upward-pointing curve of the 20-SMA, RSI above the midpoint, and MACD in the bullish zone suggest bulls are still in action.

As such, reclaiming support above $20.00 could help bulls target $23.00, with further gains likely to take LINK/USD to highs of $30.

Over-leveraged bitcoin investors in the derivatives market led to Monday’s sell-off while ether spot and futures markets are starting to get a lot more attention.

The price of bitcoin fell Monday, met by a spate of selling pressure. Around 10:00 UTC (5 a.m. ET), spot exchanges like Coinbase saw a larger-than-normal number of traders hitting sell, with 6,000 BTC in volume on the exchange during that hour. Prices dropped as low as $28,154, according to CoinDesk 20 data. 

“A lot of folks are now taking a profit after rapid growth in price,” said Constatin Kogan, managing partner at crypto investment firm Wave Financial. Indeed, bitcoin crossed $34,000 and hit an all-time record high of $34,366 on Jan. 2, according to CoinDesk 20 data. Analysts are seeing many investors realize some gains after such a rapid rise.

“Over the weekend, as bitcoin prices hit fresh all-time highs, markets touched new levels of resistance,” said Jason Lau, chief operating officer of San Francisco-based exchange OKCoin. “Profit-taking occurred around these levels, resulting in some sideways trading and causing many to be over-leveraged long on futures.”

During the 10:00 UTC (5 a.m. ET) period of higher-than-normal selling Monday, derivatives exchange BitMEX saw $10 million in liquidations, the crypto comparable to a margin call on over-leveraged bullish bets.

In total, $135 million in sell liquidations occurred on BitMEX over the past day, far outweighing the $34 million in buy liquidations from traders going short. This indicates some exhaustion of what has been a hyper-bullish market until Monday. 

Nonetheless, Lau still expects buying pressure to keep bitcoin’s price up. ”These dips are being bought up pretty quickly, reinforcing the narrative that there are underlying bids by institutions keen to access bitcoin,” he told CoinDesk. 

Some profit-taking is likely going from bitcoin into ether. Since Jan. 3, ether has exploded and is now up 38.5% in 2021 while the price per 1 BTC has appreciated 7.5% thus far in 2021.

“Traders rotated assets from BTC into alts to gain higher returns,” said Lau, who refers to ether as one of the “alts,” or alternative cryptocurrencies. “This is evident as [ether] gained over bitcoin in the last 24 hours.”

Wave Financial’s Kogan sees this rotation from bitcoin to other crypto assets as an impermanent condition. “Another interesting factor now is the alt season, so the demand slowly switches to other crypto assets. But in my opinion, this is temporary.”

Ether futures open interest crests $2.6 billion

The second-largest cryptocurrency by market capitalization, ether (ETH), was up Monday trading around $1,034 and climbing 10.4% in 24 hours as of 21:00 UTC (4:00 p.m. ET).

The ether futures market set a new record high Sunday, at $2.6 billion in open interest, or OI. Leading the way in OI is Binance with $632 million, followed by OKEx with $421 million and Huobi in third with $382 million.

Futures interest in ether is rising because savvy investors want to start hedging lofty ether price levels, according John Willock, chief executive officer of crypto asset manager Tritum. “There is a strong natural inclination for some long-term ETH hodlers to finally sell at the numerically significant $1,000 threshold, where we have seen a lot of limit orders sitting on exchange books waiting to get filled,” Willock told CoinDesk. 

He also said institutional interest in ether is growing because CME is expected to launch ether futures next month and investors are currently looking for any way to access the ether futures market. “Institutions are able to put short pressure on these markets as many people will expect a near-term price correction after this monumental and fast run-up in blue-chip crypto instruments,” Willock added. 

Other markets

Digital assets on the CoinDesk 20 are mostly green Monday. Notable winners as of 21:00 UTC (4:00 p.m. ET):

Notable losers:

Equities:

Commodities:

Treasurys:

I asked some friends who were Bitcoin noobies what they wanted to know about Bitcoin, and was ready with some answers. Here’s what we came up with.

Common Questions about Bitcoin, Answered

1. How does mining work?

Mining is a key component of the Bitcoin system. It helps secure the network, is integral to the issuance of new coins, and in a sense ties everything together. But how does it work?

Well, it’s slightly complicated, so I’ll try to explain it in a condensed way that is simple but not “too simple”, so you hopefully get the gist of it:

On average every ten minutes, transactions on the Bitcoin network are bundled together into a “block”. But in order for a block to be accepted by the network, the creator of the block (i.e. “the miner”) needs to prove they did the proper “work”. This is known as “proof of work”.

Think of it like this: In order to create a block, you have to solve a math puzzle. The puzzles are hard to solve, yet easy to verify (sort of like a Sudoko puzzle). When a miner sends a solved block to the network, the other miners can quickly check if it’s correct, and then everyone starts working on the next block.

Obviously, unlike Sudoko puzzles, these proof-of-work “math puzzles” are solved by computers running the Bitcoin software, rather than people using a pencil and paper.

The puzzles are solved using brute force trial and error. There are scads of combinations tried every second from miners all around the world. In fact, a single miner will be computing trillions of “hashes” per second. You may hear the word “hash” or “hashing” being thrown around quite a bit in Bitcoin conversations. (You don’t really need to know what a mathematical hash function is, but essentially it is the math puzzle I am referring to).

In the early days of Bitcoin, mining could be done on any computer, simply with the computer’s CPU. Over the years, mining moved away from CPU to GPU, then to FGPAs, and finally to ASICs (Application Specific Integrated Circuits). Today, you need a specialized ASIC piece of hardware to mine (ordinary computers are far, far too slow.)
When a miner produces a block, they have to bundle all the transactions that will be included, and also refer back to the previous block. All this gets put into the hash function. Because each block refers to the previous, together they make a chain of blocks (hence the term “blockchain”).

Since the blocks are chained together, this is what creates the security for Bitcoin. No one can build an alternate history of transactions without redoing all the work for those blocks, and if this is attempted, the attacker will be too slow compared with the rest of the network that is continuing to extend the blockchain.

In addition to the normal transactions being bundled into blocks, miners are also allowed to include a special transaction on each block, called a coinbase transaction, which awards the miner with freshly minted coins. Thus, the mining process provides an economic incentive to participate in providing security, while it at the same executes the issuance schedule.

“Network hashrate” refers to the total aggregate amount of mining being done by all miners on the chain, and this tends to follow the price of the coin. The greater the financial rewards, the more the system attracts miners to compete for those rewards.

Finally, there is a difficulty adjustment, whereby, periodically the network will make it either easier or harder to solve blocks, based on how fast (or slow) blocks have been coming in. As the hashrate goes up, the difficulty will also adjust upwards, and the system will continually keep adjusting so that the average time between blocks is ten minutes.

2. What are the other major coins besides Bitcoin (BTC)?

Ethereum (ETH) is the #2 coin by market cap today. Ethereum is similar to Bitcoin in that it uses an open source blockchain system, but it is more focused on smart contracts, which are computer programs that automatically execute agreements without the need for trusted intermediaries. Ethereum is often touted as being a kind of “world computer”, and is currently a backbone of decentralized finance (“DeFi”). Ethereum also hosts other coins known as “tokens”.

XRP (XRP) is a currency that runs on Ripplenet, a creation of Ripple Labs company. It aims to be an alternative to legacy financial systems like Swift. Unlike Bitcoin and Ethereum, XRP doesn’t use proof-of-work and instead is based on trusted validator nodes, which include universities and banks. XRP coins are issued by Ripplelabs.

Tether (USDT) is a coin that is pegged to the US dollar (also called a stablecoin). It doesn’t have its own blockchain and instead is issued on other blockchains including BTC, ETH, and BCH.

The peg is achieved by the Tether company maintaining dollars in a bank account, and other assets, equivalent in value to the number of circulating tethers. Tether has claimed that the coin is fully backed by USD reserves and similar assets, but some doubt this and Tether’s reserves have never been fully audited by a third party.

Litecoin (LTC) is similar to Bitcoin and is based on the Bitcoin protocol, but introduces some small changes, including faster block times and a different hashing algorithm. This algorithm was originally intended to allow more users to mine the coin, even if they do not have access to ASICS, although today ASIC mining has taken over LTC as well. Litecoin was created in 2011, making it one of the oldest coins.

Bitcoin Cash (BCH) is another major coin, and is a fork of Bitcoin (BTC). Forks allow factions of a community to split and go their separate ways when they run into irreconcilable differences. When there is a chain-split and one version of a coin splits into two different projects, holders of the original coin will then own coins on both networks.

The Bitcoin Cash project was born out of a chain split when the Bitcoin community could not agree on scaling the network in 2017. The side known as Bitcoin (BTC) has the clear economic majority at least in terms of price, but Bitcoin Cash has strong philosophical reasons for existing — namely, to continue the Bitcoin project as was originally intended: as reliable peer-to-peer electronic cash with low fees. By contrast, BTC has a limited capacity, which results in frequent periods of congestion and high fees when too many people try to use the blockchain at the same time.

3. What is the best Bitcoin wallet?

There are many options for Bitcoin wallets, and which is “the best” depends on your goals and level of experience. The highest security and most privacy comes from running your own Bitcoin full node, but this is not practical for most users, nor is it necessary.

For many users, the “best” (in my opinion) is the Electrum wallet (or Electron Cash for BCH) because it allows you to have high security without downloading the blockchain or running your own node. A distributed set of servers handle the heaviest parts of blockchain operations, but your own private keys to your coins are never sent to servers and only sign transactions locally. The electrum class of wallets are also open source, which increases their trust.

Another nice option (super for beginners) is the Bitcoin.com wallet. It’s a great way to get started using Bitcoin. It’s safe and easy.

4. How can I store Bitcoins safely?

Generally, your bitcoins should be stored in your own wallet and not kept on an exchange. As the old saying goes, “not your keys, not your coins”. This means that technically speaking when you have your coins on an exchange, you don’t actually own any coins. Instead, what you have is an IOU from the exchange.

Although this may feel like an unimportant distinction on the surface, there are real risks of keeping your money on an exchange. These risks include the exchange refusing to return your funds (either because of malice or regulatory issues), or the exchange getting hacked or going out of business, or a hacker getting into your account. If you must keep coins on an exchange, make sure to use a strong password and two-factor authentication (2fa).

When you have your coins in your own wallet, you are immune from many of the risks, but your coins can still be lost if you don’t back up your wallet and your computer dies, or if a hacker gets access. Keeping your computer up-to-date with malware and antivirus protection is recommended.

For even better security, you can look into using a hardware wallet, a paper wallet, or a cold storage wallet. We don’t have room here to do a deep dive into each of them, but it’s an excellent place for any aspiring Bitcoiner to start researching.

5. How do you know if a bitcoin transaction is legitimate?
   

Beginners wonder how it’s possible to know if a Bitcoin transaction is legit if it’s just a bunch of data. Can’t that be faked? The short answer is that your wallet knows whether a transaction is valid, and usually won’t even display an invalid transaction.

As to how the wallet knows this, Bitcoin transactions must follow a very specific format, and can only spend coins (also sometimes called “inputs”) that are themselves valid and only if the user (wallet) can produce the correct digital signature.

6. Is Bitcoin anonymous?
   

Yes and no. While Bitcoin transactions are not completely anonymous, not all transactions have a clear identity associated with them.

The privacy model for Bitcoin is different from traditional finance. Actually, the Bitcoin whitepaper has a nice diagram for this:

As you can see, in the traditional world of finance, transactions are shielded from public view, but “trusted third parties” know everything. Those trusted parties include banks, credit card companies, and so on.

In the Bitcoin model, the public can see all transactions, but there is no identity that is required to use the network. But in practice, can analysts use heuristics and algorithms to uncover who is behind certain transactions?

In many cases, they can. For example, if you withdraw Bitcoin from an exchange to your own wallet, the exchange knows who you are. If you then send the coins from your wallet to someone else, the second transaction can also be assumed to be from the same person.

There are several methods available if you want to make your Bitcoin transactions more private. One is to first exchange your coins for another coin that offers better privacy features (such as Monero or Bitcoin Cash), and then exchange them back to BTC.

7. How are Bitcoins taxed?
   

Tax law is complicated and varies widely based on jurisdiction. I am not a tax professional and you should always seek professional tax advice when it comes to finances.

That said, it appears taxes on Bitcoin are not particularly different from other assets. When you sell Bitcoins, it is generally a taxable event and taxes are owed on the profits. Unrealized profits are generally not taxed (for example, if you hold coins and don’t sell).

8. Where can you spend Bitcoins?
   

You can spend Bitcoins and other cryptocurrencies anywhere they are accepted. Often, online shops offer more cryptocurrency adoption than retail settings. One great place to find stores that accept crypto is map.bitcoin.com.

Another option is to get a crypto-based debit card. For example, this one from Bitpay. This allows you to load your coins and spend them anywhere debit cards are accepted (which is basically everywhere).