The Beginner’s Guide to Bitcoin
Bitcoin is a groundbreaking invention that has spurred a new financial revolution with long-term consequences on a global scale.
Bitcoin could very well be the most important invention since the creation of the internet. Economy experts see it as the dawning of a new age, one in which electronic cash and virtual transactions will reshape our understanding of currencies, investments and financial intelligence.
Bitcoin in a nutshell:
- Issued in 2009, Bitcoin is the first decentralized digital currency
- Bitcoin gives financial power back to the people
- Bitcoin is regulated by owners in a peer-to-peer network
- Bitcoin transactions are more secure than real money transfers
- Governmental institutions and banks do not have control over Bitcoin
- You can exchange real cash for Bitcoin
- You can use Bitcoin to pay or get paid for certain products and services
- The creator of Bitcoin is yet unknown
What is Bitcoin?
In spite of their graphic representation as golden coins with a large “B” on top, physical Bitcoins do not actually exist. They are not coins or printed bills that you can store in your pockets. The entire amount of Bitcoin units is available only in virtual form.
Bitcoin is digital cash that you can transfer online in a peer-to-peer network with other people who hold this type of electronic currency.
Bitcoin is a decentralized digital asset with decentralized value, which means that it is not regulated or controlled by governments or financial institutions.
When you possess Bitcoins, you enter an international community of Bitcoin owners. Similarly to all these owners, your presence there is anonymous, and your account cannot be tracked by standard identifying features such as your name, address or social security number.
Bitcoin is the first ever form of cryptocurrency – a combination of blockchain technology and cryptography. It is an electronic cash that users can transact without the oversight of governmental authorities or traditional banking institutions.
So, let’s break Bitcoin apart, understand cryptocurrency, discover its benefits, and open the door to new and exciting investment opportunities!
A brief history of Bitcoin
The origin story of Bitcoin is shrouded in mystery. The first official reference to it was made on October 31 st , 2008 through a whitepaper that explained some of its features and benefits. It was only a few months later, on January 3 rd , 2009 that a person or a group of people under the name of Satoshi Nakamoto announced its release.
There are several theories about whom Satoshi Nakamoto is or whether someone by that name really exists, but none can trace the invention of this new electronic cash system to a single entity. The person or persons that identified under this name disappeared in 2011 shortly after sharing the source code and the domains with the community that had formed around the revolutionary cryptocurrency.
What is Blockchain technology?
As a neophyte to the world of cryptocurrency , you can get a better understanding of Bitcoin if you know a thing or two about how blockchain technology works.
Blockchain is an unalterable sequence of transactions that rely on each other to validate their authenticity. These transactions can hold any type of data, but most of them feature economic values. They create a long string (chain) of records (blocks) that can grow endlessly without accepting data modifications.
A blockchain does not need the supervision of an external authority to certify the accuracy of its records. All blocks are connected through high-security cryptography that includes unchangeable data pointing to the previous record, such as transaction details and timestamps.
One block allows for the recording of information that cannot be altered without changing the data in the previous block in the chain (a.k.a. the parent block). Blockchain technology enables safe and permanently verifiable transactions in a peer-to-peer network. It can serve for secure cloud data storage in various industries and activities, such as:
- Businesses can use it as part of a decentralized platform for tracking shipping goods
- Institutions may use it for digital id protection or establish a secure digital voting platform
- Social media networks can use blockchains to increase the safety of their users’ personal data
When it comes to Bitcoin, blockchain technology enables the transfer of virtual money between peers in a perfectly secure transaction and as part of a fully decentralized ledger that does not require the guidance and control of external financial institutions.
How does Bitcoin work?
Bitcoin works as part of a relatively straightforward process. People who possess Bitcoins can transfer them in a peer-to-peer network. Each transaction becomes an encrypted record in the giant, ever-increasing blockchain (ledger) that also includes all the Bitcoin transfers ever made.
The system ensures that all the transactions are valid. If one file is invalid or corrupt, the ledger dismisses it without affecting the structure of the entire blockchain.
The ledger keeps a strict record of how many Bitcoins are in circulation and how many of them result from mining. At the moment, there are over 18 million available Bitcoins, which is just 3 million short of the 21 million arbitrary supply cap that was set when the cryptocurrency was initially released.
The lack of a central authority that validates transactions may seem like a risk for anyone who is new to virtual cash systems. However, it is precisely the strict peer-to-peer verification system, which involves all the members of a network that makes Bitcoin so much safer than traditional banking transactions.
What are Bitcoin wallets?
Having Bitcoins is a bit different from having a classic bank account where you store regular cash units. The ownership that you have over cryptocurrency is a bit illusory in that you don’t have actual Bitcoins but units that are stored as Unspent Transaction Outputs (UTXO) on the blockchain.
The UTXO appear in your account, which you can store in a secure deposit also known as “wallet” software. Your account is established and accessible through two digital keys:
The Public Key – think of it as the number of your traditional bank account that you can give others to send you payments or invoices.
The Private Key – think of it as the secret PIN number that you never reveal to anyone. If someone else finds out about your private key, they will have direct and easy access to your Bitcoin wallet. Once they infiltrate it, they can transfer, sell and steal your cryptocurrency. As you don’t have a central authority to address the theft to, there is nothing that you can do to ever get that virtual cash back.
The first step to owning Bitcoin involves having a virtual wallet to store them in. There are several forms of Bitcoin wallets to choose from, and they include:
Exchange Platforms
Several websites offer exchange platforms where you can trade money for Bitcoin or trade Bitcoin for other cryptocurrencies. They often have a high risk of security, but are still susceptible to hacker attacks.
The most renowned case of a successful virtual heist happened in 2014 when hackers attacked Tokyo-based platform MtGox stealing 850,000 Bitcoins that were valued at over $350 million. Since then, the security protocols and measures for exchange platforms have improved considerably.
Some popular examples include:
Wallet Platforms
Even if the banking system regards cryptocurrency as a potential threat to the present global financial structure, some banks offer clients the possibility to store their cryptocurrency in a regular bank account. Unfortunately, frequent hacker attacks make these wallet platforms the least safe alternatives for storing your Bitcoin.
Some popular examples include:
Hard Wallets
Hardware wallets are offline wallets in the form of USB sticks. Most Bitcoin users prefer this method of storage since it keeps their UTXO offline and outside the exchange system. This physical “wallet” holds both your keys and they are impossible to hack.
The only way that you can lose your Bitcoin is if someone steals your USB wallet or if you misplace it. In fact, a simple Google search will reveal hundreds of stories of people who lost up to a few million Bitcoins because they forgot where they left their hardware wallets.
Some popular examples include:
Remember, without the private key you cannot access your account, and you can never recover your UTXO! Anyone can access your ledger or hardware wallet if they have the log in details of the app (the pin and password).
Experts in the industry estimate that nearly 4 million Bitcoins have been lost forever because people misplaced or had their private keys stolen.
How to own Bitcoin
You can own Bitcoin by either mining it or buying it online. The method of acquiring digital money depends on how much you are willing to invest. Additionally, you can opt for purchasing cryptocurrency offline for real cash from a trusted source.
How to mine Bitcoin
You might have heard of terms such as “Bitcoin mining” and “Bitcoin miners” whenever cryptocurrency pops up into a conversation. As funny as it may look, there are no actual people wearing miner hats and armed with pickaxes that work relentlessly somewhere in a utopian Bitcoin mine.
Here is what Bitcoin Mining and Bitcoin Miners stand for:
Bitcoin miners are high-performance computers connected in a virtual network. They are alert nodes that wait for transactions to be initiated by users. When a certain amount of transactions builds up, they compile it into a new block.
The Bitcoin mining process begins with the miners diving into the new block of transactions. Here, they enter the contest of solving a complex math problem. Getting the right answer to the puzzle requires them to spend a significant amount of energy, which is why mining requires the use of extremely powerful hardware systems. The most popular Bitcoin miners are Application-Specific Integrated Circuits ( ASICS ) computers that compete in an increasingly laborious race for more Bitcoins.
Once the problem is solved, the block of transactions is added to a ledger based on a Proof-of-Work (POW), which constitutes the amount of energy that the miner used in the process. Successful mining rewards computers with a few Bitcoins (referred to as newBitcoins) for their POW.
Once the first miner solves the puzzle, it sends it for validation to all the other miners in the peer-to-peer network. Individual approval from each mining computer certifies the block and legitimizes the transaction. If you want to acquire Bitcoin through mining, you will need a powerful computer and a great deal of perseverance. However, the possibilities of increasing your virtual wealth are endless.
How to buy Bitcoin
Besides mining, you can buy Bitcoin and even receive them for goods and services. It takes just a few minutes to set up a virtual wallet and start acquiring cryptocurrency. There are numerous companies that facilitate this process and over 100,000 merchants that accept digital cash as a payment method. You can easily use an exchange platform that hosts virtual wallets to start storing, tracking and spending your digital cash.
Alternatively, you can purchase Bitcoin in an offline (or tête-à-tête) meeting with a trusted owner where you can exchange real cash for virtual money. In this case, you do not need a mitigating authority to complete the transaction. So, you venture in it at your own risk.
You can also purchase Bitcoin on Over-the-Counter platforms, such as:
How much is Bitcoin worth?
Bitcoin’s worth is given by the network. Its value oscillates depending on the mining activity and the viral rate of real cash conversions into cryptocurrency. As it is the case with most virtual currencies, the earlier you invest in digital money the bigger the chance to gain an overwhelming return on investment (ROI) later down the road.
You might have heard stories of people who used thousands of Bitcoins in the cryptocurrency’s early days to buy pizza and coffee. Back in 2010, $5 would buy you 2,000 Bitcoin. Today, the same amount of digital money would be worth more than $5 million. Still, it is not too late to invest in virtual currency and boost your profits as this revolutionary invention increases in popularity and use.
The initial price of Bitcoin was of just $0.008 in July of 2010. It then hit $1 in February of 2011 and went over the $100 barrier in April of 2013 when it peaked at $266. After a short drop during the summer, its value started to grow steady for the next four years and oscillating monthly between roughly $450 and $1,000.
Bitcoin value became a matter of global discussion in 2017, which is its most successful year so far. During the first three months of the year, it oscillated between $850 and $1,290 only to reach a record peak for that time of $2,000 on May 20, 2017.
It then followed an ascending rate all the way up to $19,783.06 on December 17, 2017, only to lose one third of its value in just 24 hours, dropping below $14,000. Bitcoin’s oscillation in value continued until its current stabilization at $ 9,964 ( at the time of writing ).
The overall market capitalization of Bitcoin rose from nearly $1.02 in 2013 to almost $205.40 billion in 2019.
The Benefits of using Bitcoin
Bitcoin is a newcomer in the financial world. Its network grows constantly and attracts new investments made with real money, which only increases its value. Some of the benefits of using this cryptocurrency include:
- Decentralization – People can opt to make transactions that do not require governmental or banking supervision.
- Ease of Use – The real cash value of Bitcoin that you can use, send or carry over an international border is limitless.
- Security – Blockchain technology ensures optimal security for Bitcoin transactions. Additionally, the user’s personal information remains anonymous and less prone to hacker attacks.
- Low Transaction Fees – While banks charge commission fees for most transactions that they intermediate, Bitcoin transactions only require a tiny fraction of its value.
The Risks of using Bitcoin
Although Bitcoin is ushering in a new age of financial understanding at a global scale, it’s still in its early development stages, which means that it still poses a few minor risks, such as:
- Liquidity – You can never have physical Bitcoins, and the oscillating value of cryptocurrency could have you lose a great deal of your investment in times of crisis when you would be forced to sell it at a low price.
- Volatility – Bitcoin value increases due to the networking effect. The more people use it and talk about it the more powerful it becomes. However, news of governmental or banking actions regarding cryptocurrency can diminish its value and affect the integrity of the entire system.
- Hacks – While most present-day exchange platforms employ high-security measures, owners still fear the possibility of a hacker funneling into transactions and making billions of dollars’ worth of Bitcoin to disappear in milliseconds.
Final Thoughts
Bitcoin is the first and rightly so most popular cryptocurrency on the market. At first, it may seem a bit difficult to grasp its power and potential, but the more you discover about it the easier it gets.
You can get a deeper insight of Bitcoin by becoming part of the network and exploring the numerous opportunities offered by a decentralized, free and people-backed financial system.
If this is your first time investing in digital assets , Bitcoin is the one you should start with. There is a large and solid community growing around this digital coin, and it is only a matter of time until we will see it reach global scale expansion.
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