What is Bitcoin? – The Ultimate Guide

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Unless you’ve been living under a rock, then you will have heard the word Bitcoin (BTC). You’ll probably also know that it’s a type of digital currency, but that doesn’t really begin to cover it. Don’t worry, in this guide; we will cover everything you need to know about the digital currency.

Bitcoin (BTC) Price

$3,400.42

In this article, we’ll take a look at:

  1. What is Bitcoin?
  2. What Is the Difference Between Bitcoin and Traditional Currencies?
  3. How Can I Buy and Store Bitcoin?
  4. How Can I Use Bitcoin?
  5. What is Bitcoin Mining?
  6. Best ways to protect your Bitcoin
  7. What Are the Advantages and Disadvantages of Bitcoin?
  8. Explained (Video) in 2mins: What is Bitcoin?
  9. Conclusion

What is Bitcoin?

What is Bitcoin

Bitcoin (BTC) was born in the aftermath of the global financial crisis in 2007/8. There was growing displeasure with the way that financial institutions handle cash and then received massive government bailouts to the detriment of the general public.

Following this, in August 2008, bitcoin.org was registered as a domain, while publishing the idea on a paper called Bitcoin: A Peer-to-Peer Electronic Cash System. The basis of the article explained how the currency could be used digitally, with no need for traditional banks as a central authority. It also explained that digital currency could be created using cryptography – complicated mathematical problem-solving that uses algorithms. Basing the idea on the same technology Alan Turing used during World War II. He used a machine to crack coded messages used by the Germans. This, ultimately, helped the allies to win the war.

Created in 2009

The digital currency was created on January 3rd, 2009. The first block – block 0 – was mined by the creator of the currency, Satoshi Nakamoto. To this day, nobody knows who Satoshi is. The name could be a pseudonym protecting the identity of one or a group of people. What we do know is that Satoshi owns around 1,000,000 BTC. Therefore, this makes him or her one of the wealthiest people in the world.

From here, things moved very quickly. The first open-source software model was released a few days later, and the first bitcoin transaction occurred on 12th January. As soon as this happened, blockchain as we know it was established. The blockchain is like a digital ledger – an online record of confirmed transactions with that currency. The more transactions there are, the more people there must be to confirm and facilitate these transactions.

Bitcoin today

Nowadays, the digital currency is mined and used worldwide. At one point in 2017, it was worth almost $20,000. Thanks to its success. During this period, many other cryptocurrencies were born, but the digital currency remains the most used and the most valuable of them all. Now that we learned what is BTC let’s compare the differences between BTC and traditional currencies.

What is the difference between Bitcoin and traditional currencies?

what is bitcoinThere are four critical differences between the digital currency and what we call fiat currencies.

#1 – Limited supply

Satoshi idea was to limit bitcoin’s supply. This means that for every 210,000 minded blocks, the reward would halve. The first reward was 50 BTC – However, at block 210,000 the number of rewarded coins are halved to 25. Mathematically, as this process continues, mining can only continue until a finite point – 21 million BTC. At the moment, the number of coins mined is a little over 17 million.

#2 – Control

The second difference is all about control; the supposed main reason for the creation of the digital currency in the first place. With traditional currency, the supply comes from the government and the control comes from the central banks. You store your money in a bank, which then controls transactions and interest rates. This causes problems, as you effectively surrender control of your own money to an institution. If that institution collapses, your money is in danger.

The principle behind the digital currency is that nobody has central control – this leads to digital currencies also being called decentralized. Digital ledger records all BTC transactions – known as the blockchain. The blockchain is an open record of all transactions that have ever taken place. It can’t be changed and isn’t stored in one place, meaning that it is almost impossible to hack. This reduces the risk for currency holders.

#3 – Identity

The third main difference between the digital currency and fiat is identity. With traditional money, the bank stores all transaction to your identity. This may include your address and full credit history. With BTC, however, you create a private key – like an address (also known as a bitcoin address) where money can be sent. This doesn’t require any personal details. The sender and receiver don’t need to know anything about each other to complete a transaction, as all necessary information is confirmed on the peer-to-peer network. This means that BTC users have a higher degree of control over their identities.

#4 – Speed

Finally, as the coin runs on a network that is global, transaction speeds are much faster than traditional currencies. You can send BTC around the world in under an hour. Unlike a SWIFT system, where it would take a couple of days to complete. Transaction fees are also much lower. Where people that use their processing power to confirm transactions charging far less than banks do for international exchange.

How can I buy and store Bitcoin?

If you want to buy the digital currency (BTC), the first thing you need is a digital wallet; this is where you store your currency. You can choose to have an online wallet via a desktop download or on a mobile phone. You can also have your wallet on a USB, or even on paper. A wallet consists of two keys – a public key and a private key. While the public key is visible to everyone – like a bank account number – your private key is only used when you want to verify transactions. It is essential that you keep this safe, as this is the key that could be targeted by hackers. For this reason, a lot of people pay to use a multi-signature wallet, or they keep their keys offline and only use them as and when they need them.

Steps to start buying BTC

Step 1: Open an account with a bitcoin exchange. Few of the most popular exchanges are Coinbase, Bitstamp, and Gemini.

Step 2: Deposit your regular money on to their system so that you can exchange it for BTC. You can do this with your debit or credit card.

Step 3: Keep your money on the platform or withdraw it to your wallet and keep it for when you need it.

How can I use bitcoin?

Once you’ve bought your coins, you have several options. As cryptocurrency is decentralized and unregulated, the price is prone to much higher level so fluctuation. This means a lot of people use it as a form of investment, buying low and selling high. There is also the options to exchange your BTC for a host of other currencies, trying to capitalize on fluctuations.

One use for the digital currency that is increasingly popular is for purchases. In its infancy, not many places would accept. Today, however, vast amounts of sectors take the currency as it becomes more and more mainstream. From online shopping to buying houses or paying rent, there are now thousands of sites worldwide where you can spend your crypto. People also give BTC as gifts and make charitable donations – the applications are increasing all the time, and BTC is growing in popularity.

What is Bitcoin mining?

Mining is the process by which transactions are confirmed and processed. Anyone can contribute to the process, using a Graphics Processing Unit on their home computer. You use your computational power to solve complex mathematical problems and verify transactions, which then updates the ledger.

Confirmed transactions

By conforming transactions and thus sustaining the network, the network itself produces rewards – new Bitcoins. As we mentioned before, the rewards decrease as mining increases, which makes mining progressively harder. This means that people have joined together in mining pools – groups that work together and split rewards. Nowadays, it is very unusual for miners to work individually.

Because of the computational power needed to mine BTC, mining pools have become big business. This has come with criticism though, as many people feel that the decentralized principles behind the digital currency have been compromised, with individual mining now either impossible or completely worthless. Therefore, many people hope that in the future, when there are no new coins left to mine, that the power required to continue confirming transactions will reduce, and the currency and network will stabilize.

Best ways to protect your coins

As we have become used to using fiat currency, the concept of digitization can be a bit scary. One of the most significant barriers to entry for potential new users is that they concerned about financial security. As we mentioned earlier, BTC is more secure than fiat currency, as the ledger on which transactions are confirmed is distributed across a large number of hosts. This means that it is virtually unchangeable, as so many copies exist all around the world.

Keep your keys safe

However, to avoid your reserves of BTC being hacked and stolen, you need to make sure you keep your keys safe. The cheapest options for Bitcoin wallets are based on the cloud or in the form of an app. While these are great because the interface is easy to use, you are effectively trusting a third party with the security of your keys, which feels to a lot of people like using a bank. Bearing this in mind, a lot of people choose to use software wallets. With this, you have sole control of your wallet, but you will need to make sure you keep the software updated and there is the risk that you lose or break your computer, in which case you would lose your coins if you hadn’t created a recent backup.

Bitcoin storage

The two safest options for BTC storage are hardware wallets and paper wallets.

Hardware wallets often come in the form of USB sticks or external hard drives. They are primarily offline – you only connect to the Internet when you need to perform a transaction. Because they are completely protected from hacking, they are very popular, but can also be quite expensive. Of course, you have to keep the hardware itself safe – a lot of people use a bank vault or safe to do this.

This is the same with paper wallets; you may print your keys on pieces of paper, which you then need to store so that they aren’t stolen or destroyed.

What are the advantages and disadvantages of Bitcoin?what is bitcoin

While BTC has revolutionized the way in which we interact with currency, this doesn’t mean that it is perfect. However, some advantages make it an attractive option for increasing numbers of people.

Advantages 

Freedom – coins can be sent, received and used by anyone, anywhere in the world. There aren’t any restrictions between certain countries or on certain national holidays. Transactions can take place at any time and when compared with traditional transaction methods, or almost instantaneous.

Decentralization – Your money is your own. You do not have to trust a bank with control of your currency, and this also means that you don’t have to surrender anywhere near as much sensitive, personal data when you start using Bitcoin. This reduces the risk of identity theft or losing your currency due to the failings of a third party.

Transparency – While you do need to pay transaction fees to miners, it is completely clear what you will have to pay beforehand; there are no hidden charges and these fees are lower than traditional banking when it comes to international transactions. Also, as the ledger is public, everyone can see an immutable record of what has happened. Nothing can be faked or hidden, but you maintain your anonymity because your identity has nothing to do nor it is with your public key.

Risk – Using BTC is less risky for sellers than with fiat currencies. As transactions cannot be reversed and products don’t change hands before transactions are confirmed, the risk of fraud is virtually eliminated.

Disadvantages 

Volatility – The biggest issue right now is that BTC as a currency is extremely volatile regarding its value when compared with traditional currencies. This makes it quite a risky investment option, as the price can rise and fall by much larger amounts than fiat currencies. This also affects the value of what you can and can’t buy on a day-to-day basis. Because of this, investors often use professional portfolio managers or spread their wealth across a range of different cryptos.

Information – While cryptocurrencies are undoubtedly becoming more mainstream, the basis of the digital currency does assume a certain level of technological competence. Tied to that, there isn’t a great deal of instructional material online that simplifies the process for less technical people or older generations. This has put a lot of people off – although it is changing, as more and more “how-to” documents pop up. Of course, part of the reason that educational content is limited is that BTC is still evolving and changing. It is likely that it will continue to change in the way that it works until all 21 million are mined, at which point price, transaction speed, and cost and networking will all stabilize.

Limitation – As Bitcoin is very new in terms of currency, it has usage limitation. While some significant retailers accept payment in BTC, small and medium-sized enterprises are far less likely to. Also, BTC ATMs are not particularly common outside South-East Asia, meaning that access can be slightly more difficult.

Explained (Video) in 2mins: What is Bitcoin?

Conclusion

Hopefully, this has given you a solid overview of what is Bitcoin, its history and how to use it. Ultimately, it isn’t as complicated a commodity as you might think, and its usage is increasing steadily.

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