Heard of this thing called Bitcoin? Well, our guess here is yes you have. After all, Bitcoin, the world’s most popular Cryptocurrency has been making all the headlines in recent times as it reaches unimaginable heights in terms of value. At some point, the crypto cracked over $20,000 and this was just less than a year after it broke into the $1,000 mark in January. But the volatility of Bitcoin came to the fold after the crypto shed over 50% of its value at the beginning of 2018. Nonetheless, it’s still way higher compared to the seemingly modest $1,000 in value that was reported in January 2017.
The Bitcoin story though is much more than the attention-grabbing headlines we have been accustomed to over the last few months. It’s an innovation that incorporates technology, math, currency, social dynamics, and economics. Bitcoin is a multifaceted concept. It’s highly dynamic and still evolving. This guide will help clarify a number of concepts associated with Bitcoin. It will also try to provide some answers to some of the most common Bitcoin questions.
The Back Story
Bitcoin was invented back in 2009. It’s not clear who exactly invented the crypto. The group or the person goes by the name Satoshi Nakamoto. The purpose of Bitcoin according to its creator was simple. To create a new electronic cash system that will be fully decentralized with no central authority or central server. It took about two years for Nakamoto to fine tune the crypto. As soon as it was ready, he turned in the source code and domains for the currency to other Bitcoin community members. He vanished and his whereabouts are still unknown to this day.
What is Bitcoin?
Basically, Bitcoin is simply a digital currency. You cannot see it physically or touch it like the normal bills and coins. The currency is also decentralized. This means that there is no government agency or financial institution like a bank that controls it. The owners of Bitcoin are also anonymous. Instead of using Tax IDs and official names to connect people, Bitcoin uses encrypted keys. Bitcoin, unlike the normal currency, is not issued from top down through a centralized agency. It is in fact “mined” using an array of powerful computers that are interconnected online. But you can still use coin tokens to buy Bitcoin in an ICO.
How is Bitcoin Different from Traditional Currencies?
One similarity between Bitcoin and the traditional currencies is based on its application. The digital currency can be used to pay bills digitally the same way dollars and other currencies can. But there are a number of fundamental differences and here they are:
One of the most important characteristics of Bitcoin is its decentralized nature. In other words, there is no institution or agency that controls the currency. Bitcoin is maintained by a group of volunteer coders. It is run through an open network of supercomputers that are spread all over the world. Bitcoin is often an attractive prospect for people who don’t like the kind of government control and regulation that is associated with traditional currencies.
In addition to this, Bitcoin has solved the “double spending issue” that faces the use of digital currencies. This is a problem where digital assets can easily be copied and reused. Bitcoin uses an innovative combination of cryptography and economic incentives.
In a traditional fiat digital currency, the bank will be responsible for providing these capabilities. This simply means the banks retain control of how the currency is used. Bitcoin on the hand runs on an open network of computers to accomplish this task. The network is owned by no one and this makes the currency more decentralized compared to traditional money.
- Limited Supply
Fiat currencies such as the Dollar, Euro, and others have unlimited supply. Central banks that control and regulate the currencies may decide to issue as many fiat currencies as they want and manipulate their values against each other. Eventually, the holder of the currency who has little to do with monetary policies of central banks will suffer from such actions.
Bitcoin, on the other hand, has a very tight supply system. There is an underlying algorithm that does this. Only a small amount of Bitcoin will trickle out every hour. The process will continue at a diminishing rate until a maximum of 21 million is reached. As an asset, Bitcoin is more attractive compared to fiat currency. Based on supply and demand theory, if demand for the coins rises and the supply remain as it is, the value of the currency will increase dramatically.
If you are sending an electronic payment through traditional means you will easily be identified as the sender. This is because anti-money laundering laws require that banks and payment service providers verify transactions and the identity of the people making them. However, Bitcoin users get the benefit of some anonymity.
Since there is no central agency that can validate Bitcoin transactions used in smart contracts, users can send and receive coins without the risk of revealing their identities. When a user submits a transaction request, the protocol simply checks all the previous transactions associated with the sender to see whether he or she has enough coins to complete the transaction. The protocol will then assess whether the sender has the authority to send the coins. There is no need for the sender’s name or any other identification requirements.
In practice though, it is possible to identify users based on the address of their ERC20 wallets. There are also ways law enforcement officers can use to identify users. New laws are also mandating Bitcoin exchanges to identify and verify users. This is presumably designed to guard against the abuse of Bitcoin by criminals, terror organizations, and money launderers. The networks that aid transactions in Bitcoin exchanges are also open and every transaction can be easily monitored. Although there is still some level of anonymity especially compared to traditional fiat currencies, there is still a way of knowing who is sending and receiving the currencies.
Unlike the electronic fiat transactions, transactions involving Bitcoin cannot be reversed. This is simply because there is no way to do so. Fiat transactions will often have a mediation process where someone can seek redress in case they want a payment reversed.
As for Bitcoin, once the transaction is recorded in the network and one hour has passed, then there is no way of reversing it. Although this might be a concern to some people, it is a clear indication that transactions on Bitcoin cannot be tampered with.
The smallest unit of Bitcoin is referred to as Satoshi. This is basically one hundred millionth of one Bitcoin. It’s such a small amount of value that it could easily facilitate micro-transactions. This is not something that can be achieved using traditional fiat electronic currencies.
How to Mine Bitcoin
Bitcoin is mined through a combination of advanced math and record keeping. It works in a very simple yet sophisticated way. When someone sends a Bitcoin to someone else, that transaction will be recorded in the network. All other transaction made over a specific period of time will also be recorded in a “Block”. The computers that run the special Bitcoin mining software will then inscribe each transaction on a giant digital ledger. These blocks of records are known as “Blockchain”. This is basically a giant record of all the Bitcoin transactions that have been made and it will remain openly accessible forever.
In order to generate Bitcoin, miners will need to do one thing. They must convert these blocks into sequences of code often referred to as “hash”. This is not an easy thing. It requires specialized software and advanced state of the art hardware that can be energy intensive when used. In addition to this, there will be thousands of miners competing to generate the coins. Think of it as a group of chefs who are hurryingly trying to prepare a unique and coveted dish where only the first one to get it right gets paid. In other words, it is possible to do everything right in mining Bitcoin and still end up with nothing.
When the “hash” is generated, it will be placed at the end of the Blockchain. The miner who manages to complete these transactions will get 12.5 Bitcoins. Going by the Bitcoin value in February 2018, this will translate to roughly $100,000 in cash.
What Factors Determine The Value of Bitcoin?
The value of Bitcoin is determined by what people are willing to pay for it. It’s more like the stock market and the stock prices. When Satoshi Nakamoto created the Bitcoin protocol, he made sure that only a total of 21 million coins can be minded. So far, 12 million coins have already been mined. There is still a limited supply even with this. So many economic and mathematical theories that explain why Nakamoto decided to limit the production of coins to 21 million are out there.
The value of Bitcoin is not underpinned by any competitive company performance like stocks. There’s also no government agency at the helm that controls the supply of Bitcoin. This makes value totally open to intrinsic market conditions. Anyone can interpret the value they way they see fit. This concept is known as “price discovery” and has been blamed for the high volatility associated with Bitcoin.
There are so many Bitcoin millionaires at the moment. People who were early believers of the technology and those who began Bitcoin mining early have made good money over the years. Satoshi Nakamoto, in particular, has become a billionaire all thanks to this Bitcoin wave. The Winklevoss twins who got a $65 million payout from Facebook invested some early dollars into Bitcoin and will soon become the first Bitcoin billionaires after Nakamoto.
How to Buy Bitcoin
Before you decide to buy Bitcoin, you must know that there are risks involved. Well, if you don’t mind the risks, then you can buy Bitcoin through a number of established exchanges. Some of the common exchanges include CoinMama, Kraken, CEX, and Coinbase.
You can buy, sell, or store Bitcoin on all these platforms. Getting started with Bitcoin is also so simple. Some exchanges like Coinbase allow you to deposit cash on your virtual ERC20 wallet directly from your bank account or using PayPal. Once your virtual account is funded, you can now use the fiat currency to buy Bitcoin. It takes a few days for the balance to reflect on your Coinbase account.
What Can I Do With Bitcoin?
You can use Bitcoin to buy things online from over 100,000 merchants. You can also hold the coins, wait for the value to appreciate and sell.
Is Bitcoin Legal?
Bitcoin is legal at least for now. So far the digital currency has done well to avoid regulation by government agencies but this could change in the near future. As long as you are not using Bitcoin to accomplish illegal tasks, then you won’t have any problems with the law.
What Are The Risks Involved with Bitcoin?
The volatility of Bitcoin has to be one of the biggest challenges. At one point you can wake up with $100,000 in Bitcoin value and end up with $50, 000 at the end of the day or more. There is also the risk of theft. Hackers can break into your Bitcoin wallet and steal everything. Hackers do target exchanges though and there are so many cases where the loss in millions of dollars worth of coins has been reported.
What Other Cryptos Are Out There?
There are so many cryptocurrencies called altcoins. There are more than 1000 types of crypto in the market. Some of the common alternative coins include Ethereum, Litecoin, and Ripple. The coins are not as valuable as Bitcoin but they are quite popular too.
What is Bitcoin Cash?
So, let’s talk about Bitcoin Cash. There was this disagreement among Bitcoin community members and miners as to what constitutes the appropriate size for a Blockchain. The argument couldn’t be settled. At the moment, traditional Bitcoin uses Blockchains of 1 MB while Bitcoin cash goes up to 8 MB. This debate is however far from over and it will pop up sometime in the future.