Bitcoin is definitely one of the things that have caused a lot of buzz around the world in the past years. There are many ways you can understand it and how it actually works. This article is a comprehensive guide on the most popular cryptocurrency. This guide will teach you all the basic, yet essential stuff related to Bitcoin.
What is Bitcoin?
Bitcoin was the first of what we know as cryptocurrencies. Cryptocurrencies are forms of digital money that make transactions secure thanks to encryption. Bitcoin is quite similar to other forms of currency as it can be used to purchase goods and it has a market price.
However, Cryptocurrencies are not regulated by governments or controlled by banks. There are no third parties (like PayPal, although it’s perfectly normal to buy Bitcoin with PayPal) – cryptocurrencies are traded between people. Bitcoin’s value exists outside of the traditional financial system. As Bitcoin is a perfect combination of technology and digital currency, it is very often called ‘the currency of the Internet’.
So, in brief – Bitcoin is a cryptocurrency (or a digital currency) that is absolutely independent of any country. You can use if you have the Internet connection, as it is the only necessary element. After that, you would store your coins in a wallet (like the way you store your money in a bank or in your wallet).
No fiat money is involved – everything is done electronically. As a result, you can purchase and exchange directly between anonymous cryptocurrency owners. Transactions are made on the blockchain. In addition, there are no account numbers, names or other identifiers. One could say that Bitcoin is the first truly free currency. Free from centralized control in particular. Because of that, we can say it is a sovereign-proof medium of value exchange.
Bitcoin has turned out to be quite profitable for both beginners and professionals. As a result, it has a huge market and is traded on all the exchanges you may think of. Moreover, it very often records the highest trading volumes in many exchanges.
Because of its growing popularity, many copycats have been brought to life – we call them ‘altcoins’. Most of them are forks of the Bitcoin protocol. However, some of them have developed into full Turing-complete smart contract platforms.
Bitcoin was created back in 2009 by an anonymous individual (or group) named Satoshi Nakamoto. Nakamoto used to be a frequent contributor to cryptography forums. After 10 years, we still do not know the identity of Satoshi Nakamoto.
The main idea behind creating a cryptocurrency was to start a totally new electronic cash system. The system was hoped to be decentralized and, in consequence, 100% free from the control of central authority. It was supposed to eliminate middlemen, put the seller in charge, make transactions transparent, cancel interest fees and fight against corruption. In a whitepaper published in 2008, Bitcoin was marked as a ‘peer to peer electronic cash transfer system’.
It is no coincidence that Bitcoin was created right after the market crisis in 2008. A currency that leaves little room for corruption was needed. When you add that it is transferred directly, anonymously and digitally, there couldn’t have been a better solution than to put the power into hands of buyers and sellers.
How does Bitcoin work?
Most important properties of Bitcoin
You receive Bitcoin on ‘addresses’ – randomly seeming chains of approximately 30 characters. Your transactions/accounts are not connected to any identities.
You cannot reverse any transaction once it is confirmed. No one can. Even if you sent your money to a scammer or if someone hacked your computer.
Transactions are processed in seconds in the network. Consequently, they are totally independent on your physical location.
Bitcoin uses a public key cryptography system. Only the owner of the private key can send the coins. That is why we can say that probably nothing is safer than a Bitcoin address.
As we mentioned above, Bitcoin has no central monetary authority. It is underpinned by a peer-to-peer computer network. This network is made up of users’ machines and Bitcoins are generated mathematically. The process of generating them is called ‘mining’. What is really fascinating, the total number of Bitcoins is limited to approximately 21 million due to mathematics of their system.
A few words about blockchain technology
Bitcoin is the original blockchain. To put it simple, blockchain is a series of data blocks (cryptographically linked) that contain the transaction data. Blocks are usually around 1 MB in size which can hold up to 3,000 transactions.
All miners mine new blocks every 10 minutes (approximately). There is a process called Nakamoto PoW Consensus which makes transactions incorporated into blocks by miners. During the process, transaction data is validated and secured. Transactions within blocks are continually hashed and paired in a binary hash tree.
Once the root hash is reached, all transactions are stored in the block header. Each block stores the root hash of the previous block – now you know where the name blockchain comes from. Clients store the blockchain locally. At the same time they propagate transactions across the network. It is worth mentioning that blocks are transparent and public. Furthermore, transactions within a block cannot be modified – if so, all transactions would be modified. This feature makes Bitcoin immutable.
What can you do with Bitcoin?
Where to find Bitcoins
As Bitcoin is not a centralized currency, you will not find it in any places that deals with traditional money. However, there are four other places that you can get your first Bitcoins from:
- A cryptocurrency exchange
Probably this is the most popular place if you want to start your cryptocurrency adventure. Cryptocurrency exchanges are online places that accept payment in traditional money for Bitcoins. In the US and Canada it is best to use Coinbase and Coinsquare and in the UK the most popular exchanges are BitBargain UK and Bittylicious. On such cryptocurrency exchanges you will find both regular Bitcoins and so-called ‘satoshis’ (the ‘cents’). The process is very simple: you set up an account with a payment company. After that, you can purchase as many Bitcoins as your bank account allows.
- A Bitcoin ATM
The most famous ones are BTER and CoinCorner. At Bitcoin ATMs you can change Bitcoins or cash for another cryptocurrency. Such an ATM is just a money vending machine, very similar in function to general ATMs.
- Classified services like LocalBitcoins
Those are places where you can find a seller. This person will help you exchange Bitcoins for cash. So, it is like buying it directly from other people.
- Websites like Purse where you can sell products and services for Bitcoins.
What is more, there are sites called ‘Bitcoin faucets’ where you can exchange it for time (watching ads, writing articles etc.). Keep in mind that the ROI there is very little.
There are four steps you need to follow while buying:
- First you need to decide which cryptocurrency exchange you will use to purchase coins. Coinbase is believed to be the most popular exchange in the world.
- Then, you should download a Bitcoin wallet. Actually, you should do this before you sign up on the exchange platform. Very often the cryptocurrency exchange provides their users with such wallets.
- When you have the wallet and you signed up at the exchange, it is time to pay for the corresponding number of Bitcoins. You can use your credit/debit card or pay via bank transfer. Additionally, you can also buy Bitcoin with PayPal, or Skrill.
- Instantly after your payment is processed, you will have your coins in your wallet.
What is Bitcoin mining?
Bitcoin mining is a way of creating Bitcoins. Everyone can mine – you just need to make your computer solve complex math puzzles. However, this process requires a great amount of electricity and of course extremely powerful computing chips. Devices that mine cryptocurrencies (or people who do it with their own devices) are called miners. This is how the mining process looks like:
- The mining software collects all transactions in the network.
- Transactions are validated, if there are any conflicting ones, they are rejected.
- Transactions that left are packed into blocks.
- The blocks are submitted to the blockchain and then new Bitcoins are created as a reward.
It is worth knowing that Bitcoin creation is not endless. Satoshi Nakamoto placed a cap of 21 million Bitcoins – this is a finite number and there will never be more. Currently, at the beginning of 2019, around 18 million have been already mined.
Mining makes the process of creating Bitcoins secure because new transactions are added chronologically to the chain and then they are kept in the queue. After a transaction is complete, blocks are chopped off and codes are decoded. As a result, Bitcoins are exchanged or passed.
How to store your coins?
A Bitcoin wallet is very similar to a physical one. However, instead of storing the currency, it stores all your private keys that are linked to your Bitcoins. All types of wallets allow you to see your balance. A well-designed wallet makes using Bitcoin much more convenient and intuitive. You can use a few different kinds of wallets.
The main difference between wallets is the storage method. There is so-called ‘hot’ storage (your Bitcoins are stored online) and ‘cold’ storage (completely offline). Your choice of wallet should depend on your investment strategy and your ease with technology.
Software wallets ‘live’ on your device, with some being cloud-based. Most of them are ‘hot’ storage wallets. They are great for quick access and easy transfers. Most software wallets are both free and have easy configuration. However, their great disadvantage is that you need to make backups frequently.
Software wallets include:
- Desktop wallets – they are downloaded to your laptop/PC and they are only accessible from that device.
- Online wallets – they are cloud-based and accessible on any device so they definitely offer the greatest convenience. Technically, they are the easiest to hack.
- Mobile wallets – they operate through an app on your smartphone. They are especially useful if you use Bitcoins to pay in shops or if you often transfer funds while on the go.
Hardware wallets ‘live’ on an external device (USB/hard drive etc.) You can access such wallet by plugging the device into a computer. Data is stored completely offline so hardware wallets are called the ‘cold’ ones.
We can say that hardware wallets seem to be more secure than software wallets. However, they are way more inconvenient to use.
Paper wallets are just pieces of paper containing your private keys. That is to say, you do not rely on software/hardware, you just keep your paper wallet safe. Paper wallets are believed to be the best option for the long-term storage. They are relatively safe as they are away from virtual attacks. Moreover, they are not connected to any network. However, they can be easily lost from fire or water.
How to spend Bitcoins?
Currently, there are more than 100,000 merchants worldwide that accept Bitcoins as a payment method. The cool thing is that there is no physical trace of transactions as of physical currencies. There are only records of transactions that were proceeded between different addresses.
In order to spend Bitcoins, you need to share your Bitcoin address for the recipient to decode using their wallet. Your transaction is recorded on the blockchain and it is available to all users to see.
Advantages and disadvantages
Bitcoin has its fans and opponents. The most important advantages are the following features:
- Bitcoin is decentralized – you can proceed international transactions and settle international deals and you do not have to worry about extra charges and exchange rates.
- It is government-free – there is no interference and manipulation. And there are no interest rates.
- Bitcoin is 100% transparent – you know what is happening with the money you own.
- It is easy to start with – you do not have to set up any merchant/buyer account, buy any credit card etc.
- It cannot be forged – no one can demand a refund.
However, there are also disadvantages:
- Hacks and scams – those are norms in the online world though. They happen very often and month after month they are more sophisticated. The most popular scams, typical for Bitcoin transactions, are: Ponzi scams (hooking people with very high interest and then redirecting money to the thief’s wallet), Bitcoin mining scams (you pay a company to mine Bitcoin for you but they just disappear with your cash), Bitcoin exchange scams (a company offers features unusual for Bitcoin wallets, e.g. PayPal processing) and Bitcoin wallet scams (fake wallets that ‘ask’ for your money).
- The transactions themselves are relatively slow – sometimes you need to wait up to 10 minutes for your network to approve the transaction.
- Bitcoin’s software is quite complex and the currency itself is volatile – this may discourage people from using Bitcoins.
Is Bitcoin safe?
Since the very beginning of Bitcoin, there have been many warnings about the cryptocurrency. What is interesting is that most of them have been raised by investors who have been afraid to lose their packet. Their main doubts are the following:
- Bitcoin is not regulated by any state and has no central bank.
- As of most of investments, the bubble can burst.
- Many finance experts and investors treat Bitcoin as a ‘fool’s asset’. For many, it is believed to be a highly speculative investment.
However, someone can steal your Bitcoins just as they can steal your physical money. After all, Bitcoins are protected by a password and a private key which means these credentials must be given to an untrustworthy party for the wallet to be stolen. However, unlike with banks, there is no way to get the stolen cryptocurrency back.
It also goes for when you destroy or lose the computer (or any other device) where you store your Bitcoins (think about the investor Jered Kenna who lost $200,000 while reformatting his computer).
Keeping your Bitcoins safe is not as difficult as you may think tough. Simply use our tips for those who want to protect their money:
- Try not to store huge amounts of Bitcoins in one wallet. This is just the same as you do with your regular wallet – you only store small amounts of currency there at once. Same with Bitcoins, keep most of your coins in a safer environment.
- Backup your wallet regularly. It is also good to encrypt your wallet (or smartphone if you have an online wallet) with a strong password. This way you protect yourself from thieves. Above all, try to keep your private keys secure and offline.
- Do not use online wallet only. You should store some of your Bitcoins in an offline wallet only. Being disconnected from the network is a higher level of security.
- Make sure you have an up-to-date software. There are many safety features released on a regular basis. That is why you should also use a variety of software to keep your Bitcoins secure.
Get familiar with some important terms related to Bitcoin that any investor should know:
- Altcoin – a cryptocurrency that is alternative to Bitcoin (examples: Ethereum, Litecoin).
- Bit – a sub-unit of Bitcoin (1 bit is 0,000001 BTC).
- Bitcoin – the currency and technology as a whole. Abbreviation: BTC or XBT.
- Confirmation – it occurs when a transaction has been processed by the network and then recorded onto a block. The confirmation is made by miners.
- Cryptography – the act of writing in or deciphering code. Cryptography allows users to create secure transactions, as well as encrypted wallets.
- Mining – Bitcoin’s proof of work system where a computer hardware does complicated mathematical calculations. This way the transactions are safer and new Bitcoins are created. People who use their computers for mining are called miners.
- Private key – a confidential piece of data that validates your right to spend Bitcoins from a wallet. Each wallet has its own private key. You may think of private key as it is a Bitcoin password.
- Signature – a piece of cryptography that validates your Bitcoin ownership. Signature is the public-facing side of your private key.
Is Bitcoin still worth investing in 2019?
At the end of 2018 many investors said Bitcoin’s over. However, the world of cryptocurrencies has its bear and bull cycles. All cryptocurrencies go up and down many times and this does not surprise anyone.
Even if Bitcoin is now worth only $3,600 (approximately), there are many positive signals showing that investing in it now might be a good idea. BTC is still above its 2017’ price and blockchain technologies are more and more popular and most of the money-transfer-related problems have been already solved.
In short, a potential for Bitcoin’s growth is huge. Since 2018, more and more countries have declared themselves as crypto-friendly and also many global investment companies have been showing their interest in Bitcoin (and other cryptocurrencies).
Besides, there is a chance that a Bitcoin Exchange-Traded Fund will be created by the United States Securities and Exchange Commission. With many institutional investments coming and blockchain technology being applied by more and more companies, 2019 might be a good year to invest in Bitcoin.