What is Bitcoin (BTC)?
Luis Clark
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Luis Clark
What is Bitcoin?
Bitcoin is a crypto asset, a form of digital money intended to function as money and a means of payment free of any central authority, government, state, or financial institution, and hence eliminate the need for third-party involvement in financial transactions. Bitcoin allows for secure and seamless peer-to-peer transactions on the Internet. Bitcoins purchase is usually from a cryptocurrency exchange. There are several crypto exchanges, and some of the crypto exchanges, such as Coinbase, Binance, etc., are the best for buying Bitcoin. For blockchain miners, Bitcoin is a reward for their efforts in verifying transactions.
Bitcoin’s creator, supposedly Satoshi Nakamoto, initially defined the need for an electronic payment system that relied on cryptographic proof instead of trust. An alternative to fiat currency, Nakamoto initially created Bitcoin, a form of digital money, with the intention that one day it would be a form of payment for goods and services worldwide, thus replacing traditional currencies. Large corporations that accept Bitcoin include PayPal, Whole Foods, and Microsoft, to name a few.
Bitcoin is considered a store of value similar to gold and split into smaller units called “satoshis” (one Bitcoin is up to 8 decimal places) for use in payments. However, the history of Bitcoin as a store of value has been tumultuous; it has experienced many boom and bust cycles. The price of one Bitcoin has climbed significantly since its creation, going from less than a penny to tens of thousands of dollars. The price of Bitcoin and its users increased in waves over the years. When referring to Bitcoin as a market asset, we use the ticker symbol BTC.
Who Created Bitcoin?
To understand how Bitcoin works, it aids to start at the beginning. The originator of Bitcoin is still a mystery ten years after the invention of the technology, despite extensive research by journalists and members of the cryptocurrency community. The fundamental ideas behind Bitcoin first surfaced in a white paper posted online in late 2008 by the unknown author(s) or group known only by the pseudonym Satoshi Nakamoto.
This paper wasn’t the first to propose a cryptographic and computer science-based form of digital currency; it referred to earlier ideas. However, it offered an exquisite solution to the issue of establishing trust between various online entities where individuals may be concealed (like Bitcoin’s creator) by pseudonyms or geographically dispersed.
The blockchain ledger and the Bitcoin private key are two related ideas that Nakamoto created. When you hold Bitcoin, you control it via a private key—a string of randomly assigned numbers and letters that activates a virtual vault containing the purchase.
How Does Bitcoin Work?
Bitcoin works very differently from traditional money in several ways. It is neither issued nor regulated by a central bank, it has a fixed quantity (which means one cannot create additional Bitcoins at will), and its price is unpredictable. Understanding these variations is essential to comprehending Bitcoin.
With a peer-to-peer network, users can execute and validate transactions without the assistance of a middleman. Users are often people or entities looking to exchange Bitcoin with other users on the network. Users can directly connect their computer to this network and download the public ledger containing a record of all previous transactions.
This ledger uses “blockchain technology,” sometimes called “distributed ledger technology.” The Bitcoin blockchain is a public ledger, recording Bitcoin transactions as a chain of blocks. Each includes a block’s cryptographic hash until the chain’s genesis block. A network of interacting nodes maintains the blockchain using Bitcoin software. Bitcoin cryptocurrency transactions may be verified, saved, and organized in a transparent, immutable manner thanks to blockchain technology. These qualities are crucial for a payment system that depends entirely on transparency and immutability.
When new transactions are verified and posted to the ledger, the network updates each user’s ledger copy to reflect the most current changes. Imagine it as a public Google document that automatically updates whenever a user with access changes any of its content.
As its name suggests, the Bitcoin blockchain is a digital chain of chronologically ordered “blocks” – code sections containing information about Bitcoin transactions. It is crucial to note that mining Bitcoin and validating transactions are two distinct procedures. Mining can still occur whether or not the user adds transactions to the blockchain. The rate at which miners discover new blocks does not necessarily increase in response to a surge in Bitcoin transactions.
No matter how many Bitcoin transactions are awaiting confirmation, Bitcoin allows adding new blocks to the blockchain about every ten minutes. The blockchain’s openness allows all network users to view and analyze transactions in real-time. The likelihood of double spending, a problem with online payments, is reduced by this technology. Double spending occurs when a user spends the same cryptocurrency twice.
As most miners must verify the legitimacy of each data block before it is added to the blockchain, a process known as “proof of work” (POW), the independent network of miners reduces the possibility of fraud or fraudulent information being recorded.
Bitcoin has thousands of copies of the same ledger. Therefore, it needs the entire network of users to agree on the validity of each Bitcoin transaction. The agreement between all parties is known as “consensus.” Everybody who possesses a copy of the Bitcoin ledger is responsible for verifying and updating the balances of all Bitcoin holders, just as banks continuously update their customers’ balances.
Proof-of-Work
Proof-of-work is a process that computers use in the Bitcoin network to verify transactions and safeguard the network. The “consensus mechanism” for the Bitcoin blockchain is proof-of-work.
Proof-of-work promotes some network contributors to the position of “validators” — more formally known as “miners” — but only after they have displayed their dedication to the network by devoting a significant amount of computing power to finding new blocks, which usually takes 10 minutes.
Before payment is in a queue for validation, all Bitcoin users must first pay a network fee. When adding a transaction fee, the primary objective is to surpass or match the average fee paid by other network participants. Therefore, your transaction is processed promptly. Miners prefer transactions with the highest fees to make the most money possible when filling new blocks because they are responsible for paying their own electricity and maintenance costs when operating their machines all day to validate the Bitcoin network.
You can see the average fees on the Bitcoin mempool, which is comparable to a waiting area where pending transactions are kept until they are chosen and added to the blockchain by miners.
Bitcoin Features
Bitcoins are becoming increasingly popular, and their usage is increasing at an accelerated pace geographically. The different features of Bitcoin are:
Decentralized
There is no CEO, no one owns or manages the Bitcoin network. Instead, the network comprises voluntary individuals who accept a protocol’s norms (which takes the form of an open-source software client). Changes to the protocol A majority of its users approve changes to the protocol. These users include “nodes,” end users, developers, “miners,” and members of related industries such as exchanges, wallet providers, and custodians.
As a result, this makes Bitcoin a sort of political system. However, it doesn’t seem like Bitcoin is the most decentralized cryptocurrency out of all digital currencies, because it can be seen that there are only few Bitcoin wallets holding the most coins. This means, that these individuals or entities have at least some control over BTC and the Bitcoin network – at the very least the value.
Still, Bitcoin is digital money, permitting secure peer-to-peer transactions on the Internet. Bitcoin is useful for transacting value outside the traditional financial system.
Distributed
The “blockchain” is a public ledger that serves as the repository for all transactions. The network depends on users running the Bitcoin protocol software and freely storing copies of the ledger. These “nodes” assist in properly propagating transactions throughout the network by adhering to the protocol’s regulations established by the software client. Since more than 80,000 nodes are there over the globe, the network can’t have an outage or data loss.
Transparency
Adding new transactions to the blockchain record and determining the current status of the Bitcoin network (also known as the “truth” of who possesses a certain amount of Bitcoin at any given moment) is agreed upon through consensus and follows the protocol’s rules in a clear and open manner.
Peer-to-Peer
Although nodes store and spread the network’s state (also known as the “truth”), payments move from one person or company to another. Hence, no “trusted third party” is needed to serve as a middleman.
Permissionless
There are no gatekeepers, no need to set up a “Bitcoin account”, and anyone can use Bitcoin. The network will confirm all transactions that adhere to the protocol’s requirements using the specified consensus mechanisms.
Public
Every Bitcoin transaction is documented and made publicly accessible to everyone. It eliminates the chance of fraudulent transactions and makes it easy to link particular Bitcoin addresses to individual identities. Several initiatives improve Bitcoin’s privacy, but how they will be a part of the protocol will ultimately depend on how Bitcoin’s governance works.
Fixed Supply
The fact that the supply will grow over time to a total of 21 million coins is one of the primary characteristics of the Bitcoin system. This known and fixed total supply makes Bitcoin a “hard asset,” one of several features that have influenced how valuable investors view it.
Weaknesses of Bitcoin
- We cannot use Bitcoin for many daily transactions because of its lengthy transaction times and high transaction fees.
- Detractors of the project often criticize it for its high energy requirements and probable environmental repercussions.
- Critics have noted that the Bitcoin cryptocurrency is an ideal tool for carrying out black market transactions, leading to links between it and criminal activity. Money has served this purpose for ages, and Bitcoin’s open ledger may serve as a tool for law enforcement.
- Allegedly, no one knows who created Bitcoin, making it difficult to fully trust.
How is Bitcoin Created?
When miners discover and add new blocks to the blockchain, the Bitcoin network automatically distributes newly created Bitcoin to them. The protocol will stop issuing new coins once there are 21 million coins in circulation, which is the limit of the total supply of Bitcoin. In a sense, the process of issuing new Bitcoins and validating transactions is through Bitcoin mining.
Remember, when there is an increase in the amount of computer power dedicated to mining Bitcoin, it doesn’t mean that more Bitcoin will be mined. The amount of Bitcoin mined remains relatively stable over time. However, miners with greater computing power have a higher chance of being rewarded with the next block as payment.
In the “Bitcoin halving” currency distribution strategy, the Bitcoin network users ensure that the total number of Bitcoins issued to miners declines over time. The premise is that gradually reducing the amount of new Bitcoin that enters circulation will boost the asset’s price (based on the principles of supply and demand.)
A Bitcoin halving, also known as a “halving,” occurs every 210,000 blocks or approximately every four years. A block reward of 50 Bitcoin (BTC) was given to each successful miner when the Bitcoin protocol came into being in 2009. In 2021, block rewards decreased from 12.5 BTC before the halving of Bitcoin in May 2020 to 6.25 BTC.
Block rewards can decrease again to 3.125 BTC at the next halving, likely to occur in 2024. When there are no more coins remaining, the mining process will finally come to an end.
Approximately 18.7 million Bitcoins are currently in use, leaving 2.25 million Bitcoins available for mining. However, it is possible that the last Bitcoin mining will be around 2140, considering the halving principle and other network characteristics like mining difficulty.
Which Blockchain Does Bitcoin Use?
The blockchain is a distributed, open ledger that records each Bitcoin transaction’s history. The ‘Bitcoin Blockchain’ refers to the virtual ledger that records Bitcoin transactions and private keys. Anybody can access the blockchain and examine it to track the movement of Bitcoins from one transaction to another. Even though there is a record of every Bitcoin transaction, the transactions do not link to real-world identities. Hence, Bitcoin is as pseudonymous.
Bitcoins are not files like MP3s or PDFs on your computer’s hard disc. Instead, “owning Bitcoins” refers to having a Bitcoin address with a balance visible on the blockchain. Owning a Bitcoin address means having authority over the corresponding Private Key, enabling the signing of transactions.
How to Use Bitcoin?
Unlike traditional currencies (fiat) used to make purchases anywhere, we cannot use Bitcoin to make such purchases. Transactions using BTC are not that different from those using a credit card or debit card. However, instead of entering card details, you will enter the payment amount and the vendor’s public key through a wallet app. When using a smartphone or tablet to purchase in person, a QR code will appear to simplify the procedure. When you scan the code, your wallet software will instantly enter the necessary information. Moreover, the Bitcoin network’s cryptographic nature makes Bitcoin payments more secure than debit and credit cards.
One of its advantages is that less personal information is required when using Bitcoin as payment. You shall disclose your name and address if you’re buying physical goods that need shipping. What you should do with your Bitcoin is entirely up to your personal preferences.
You can use debit cards or buy gift cards from several online merchants to spend your Bitcoin holdings. Many businesses provide Bitcoin debit cards that let you use a regular debit card to spend the funds in your cryptocurrency account. We can use a Bitcoin debit card to pay for products and services.
Additionally, you can use it to get cash from an ATM, or you may instantly convert your cash into Bitcoin using a Bitcoin ATM. A Bitcoin ATM is one where you insert money instead of a standard ATM, which lets you withdraw cash. You deposit cash, which subsequently converts to Bitcoin.
If you don’t want to spend your Bitcoin directly, you have the option to buy gift cards with Bitcoin. These gift cards can be used in places that usually don’t accept Bitcoin, giving you a great opportunity to use your Bitcoin in different stores.
How to Buy Bitcoin?
The most straightforward way to buy Bitcoin is through a crypto exchange. An exchange makes it very easy to buy, send, sell, receive, and store Bitcoin without holding it yourself using private and public keys.
If you choose to buy Bitcoin and store it somewhere other than an online exchange, then,
- Each user who joins the Bitcoin network is given a public key. It is a long string of numbers and letters similar to an email address, and a private key is similar to a password.
- You receive a public key when you buy bitcoin, send it, or receive it. Think of it as a key that opens a virtual safe and grants you access to your funds.
- Anyone can send you Bitcoin using your public key, but only the owner of the private key can get access to the coin that has been sent and stored in the “virtual vault.”
- Unlike many other equity purchases, a Bitcoin purchase takes a little while to complete. It could take at least ten to twenty minutes for your purchase to appear in your account because miners must verify Bitcoin transactions.
Other options to buy the coins are:
1. Buy shares in Bitcoin-related companies
You can purchase shares of companies that accept Bitcoin as payment or invest in cryptocurrency exchanges.
2. Bitcoin ETF
You could put money into an exchange-traded fund (ETF) for Bitcoin. You can purchase shares in the fund without actually trading Bitcoin because Bitcoin ETF mirrors the digital currency’s price.
3. Bitcoin Funds
Several investment firms are introducing Bitcoin funds. However, selling their investment and getting the money back is easier than investing directly.
How to Store Bitcoin?
Bitcoins are kept in a wallet, a digital wallet, just like we keep cash or credit cards in a real wallet. Digital wallets can be web-based or hardware-based. The wallet can be stored on a desktop computer or a mobile device or kept secure by writing the private keys and access addresses on paper.
Without a set of keys, the owner of a Bitcoin wallet cannot access the currency. The most significant threat to Bitcoin’s security is a user accidentally losing or having their private key stolen. The user can never see Bitcoins without the private key. There are different types of wallets to store Bitcoin.
An exchange or service provider maintains a hot wallet in the cloud. “Hot” wallets are another name for online wallets. Hot wallets are digital cash systems that function on Internet-enabled devices like smartphones, PCs, tablets, and laptops. Since these wallets generate the private keys to your money on these internet-connected devices, this might lead to vulnerability. A hot wallet can be practical because it allows you to instantly access and deal with your funds, but it also lacks security.
A cold wallet is an offline Bitcoin storage device that isn’t linked to the Internet, making it much less susceptible to hacking. Another name for these wallets is offline wallets or hardware wallets.
Future of Bitcoin
The crypto market has had a dismal first half of 2022. From its all-time highs in late 2021, Bitcoin’s price has fallen by more than 50%.
In 2021, the price of Bitcoin reached several new all-time highs, followed by significant declines and increasing institutional investment from substantial firms. The Biden administration and U.S. government representatives have shown an increasing interest in new cryptocurrency legislation. People continue to be interested in cryptocurrency, which is becoming a hot topic in popular culture.
However, the sector is still nascent and continually changing. That largely explains why any new high for Bitcoin can quickly lead to steep falls. So, what is next for the rest of 2023? Long-term forecasting is challenging, but in the near future, industry professionals will be watching developments like institutional acceptance of cryptocurrency payments and regulation to try and gain a better understanding of the market.
Closing Thoughts
Bitcoin is highly volatile. If you’re prepared to take the risk, be sure you know what you’re investing in and have a plan for your cryptocurrency investments. Make sure you aren’t investing merely out of a fear of missing out. Before investing, you should consider the following questions:
- Do I understand what I’m investing in, how Bitcoin works, and how the cryptocurrency market operates?
- Am I content with the amount of risk?
- How expensive is it now compared to a few months ago? Why do I want something because it costs more money if that’s the case?
- Are there any indications that prices could increase any further?
- If I purchase it now to sell it for a higher price later, who will later buy it from me and why?
Our extensive analysis of the different Cryptocurrencies doesn’t stop here. You can also check out our full list of Cryptocurrencies explained in details.
FAQ
Most frequent questions and answers
Yes. The best ways to cash out Bitcoin are through a third-party broker, over-the-counter trading, or a trading platform operated by a third party. Peer-to-peer trading is another option. There are few restrictions on daily withdrawals when withdrawing a large sum of Bitcoin. Some countries also have Bitcoin ATMs available, or you can use crypto debit cards to pay for goods and services.
Technically speaking, Bitcoin is real money. There are no actual notes or coins available because it is entirely online. It can be used to make purchases, but not many stores currently accept it.
Bitcoins are kept in a “digital wallet,” which can be found on a user’s computer or on the cloud. The wallet functions as a sort of online bank account that lets users send and receive bitcoins, make purchases, and store money. Bitcoin wallets are not covered by the FDIC, unlike bank accounts.
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