What is Bitcoin (Everything You Need to Know About Bitcoin)
by: Best Bitcoin Brokers
Bitcoin is a type of digital currency in which encryption techniques are used to regulate the generation of units of currency; also verify the transfer of funds, operating independently of a central bank.
This means that no one controls it. Bitcoins are produced by people and as such are the first category of money known as cryptocurrency.
Who Created Bitcoin?
Satoshi Nakamoto.
That is the short answer. He is a software developer and originally proposed an electronic payment system based on mathematical proof.
His idea was to produce an independent currency with very low transaction fees.
Why Bitcoin is Different Than Fiat Currencies
Bitcoin can be used to buy things online like other currencies. What makes it different than let’s say the US Dollar is that it lacks centralisation.
There is no institution that controls bitcoin. Depending on your point of view, this could be a great advantage since no bank can control bitcoins.
There is also no one printing bitcoin. Bitcoin is created digitally. Bitcoin are “mined” using computer power.
In a network of servers, this virtual currency is distributed by its members effectively making it its own payment network.
Is There a Limit of How Many you Can Create?
Let’s play a quick game. How many are out there according to you?
5 mil?
10 mil?
17 mil?
Try 21 million!
Only 21 million bitcoins can ever be created. Surprised? Well, don’t be:) The little trick here is that these coins can be sub-divided into smaller ones.
Thus, the smallest bitcoin is called “Satoshi”- after its founder. It is one hundred millionth of a bitcoin.
How Does One Acquire Bitcoins?
Unlike other conventional ways, bitcoins are acquired through several different channels:
- Exchange bitcoins a person near you
- As a payment for goods or services
- Through a Bitcoin Trading Platform
Alternatively, because of the high entry barrier, some are choosing retail brokers
While it may be possible to find individuals who wish to sell bitcoins in exchange for a credit card or PayPal payment, most exchanges do not allow funding via these payment methods.
This is due to cases where someone buys bitcoins with PayPal, and then reverses their half of the transaction. This is commonly referred to as a chargeback.
What is Bitcoin Based On?
Fiat currency has been based on precious metals like gold and silver. As we have seen in 1971, US President Nixon announced a suspension of the Bretton Woods agreement.
Bretton Woods was established to link the US Dollar to Gold and make the dollar a more secure world currency.
So what is the case with bitcoin?
Mathematics.
That’s right, bitcoin is purely based on mathematics. Software programs around the world follow a mathematical formula to produce bitcoins. It is freely accessible and anyone can check it HERE.
It is an open source, so that anyone can have a look into and make sure it is working as it is supposed to.
Is Bitcoin 100% Virtual?
I would say that it is as virtual as a credit card. it is as virtual as online banking. On the other hand, bitcoins can be exchanged for physical cash or used to pay online for products/services.
Bitcoin balances are stored in a network and they cannot be altered by anyone. In other words, if you own bitcoins, you are the only one that has control over it. Bitcoins cannot just disappear because of their virtual origin.
What If I Lose My Bitcoins?
Can you really lose Bitcoins?
Yes!
If you loss your wallet your bitcoins are lost. They remain in the block chain, however they are dormant forever. This makes other bitcoins appreciate in value. In the end, it is pure supply & demand.
Is It Easy to Set Up?
Yes. You can set up a bitcoin account in seconds. No questions asked, no fees payable.
Is It Legal?
A lot of people are having the same question. Is bitcoin legal? As far as we know, Bitcoin has not been made illegal in a lot of jurisdictions.
You can check out this list of legality by territory.
There are still some countries that restrict/ban foreign currencies.
Russia
Argentina
Thailand (limited)
Bitcoin and Regulation
If all users agree, then YES.
Assigning the rights to a local authority- practically NO. If that was possible, then any rich organisation could invest in mining hardware and try to control half of the computing power.
How can you regulate Bitcoin like other instruments, say the dollar.
Like other currencies, Bitcoin could be used for legal, as well as, illegal activities. In this regard, it is the subject of jurisdiction to each country.
Bitcoin usage can also be restricted by local authorities. Check the list of legality by territory again. This would prevent Bitcoin from domestic businesses and will shift innovation to other countries.
Will the Price of Bitcoin Go Up or Down?
No guarantee.
There is no guarantee that the price will continue going up or start falling. Like any other early startup, it can gain traction due to its usefulness or never break through.
Bitcoin is still in the very early stages. It has been designed with a long-term in mind and it is very hard to predict.
Are There Other Equivalents to Bitcoin?
Indeed.
Here is the full list of cryptocurrencies, as they are called. However 6 are the major ones.
-Litecoin (LTC)- launched in 2011, it was among the initial cryptocurrencies often referred to as the “silver to Bitcoin’s gold”. Litecoin is known for its faster transaction confirmation
-Ethereum (ETH)- Ethereum has the second market capitalization after Bitcoin with $4.46B. It is a decentralized software platform that enables Smart Contracts to be run without any downtime.
Zcash (ZEC)- It offers selective transparency and privacy of transactions.
Dash- it offers even more anonymity. It can be mined using CPU or GPU. Dash stands for Digital Cash.
Ripple (XRP)- Does not need mining. Therefore, it offers instant settlement and low-cost international payments.
Monero (XMR)- Open-source secure and untraceable currency. It enables complete privacy by using a special technique called “ring signatures”.
Here is an infographic from our friends from Virtual Currency Online going into more details and visualisation:
Mining
Since we mentioned “mining” on a few occasions already, let’s go over it. So what is MINING?
Simply- that is a data center. Decentralised! There is not a single person or authority that has control over it. 
Still Confused! How Does It Work? Can I Become Miner?
YES! Everyone can be a miner. You just need:
- specialised software/hardware
- skills
Processing transactions through the peer-2-peer network. Miners help increase transactions’ speed in this way and earn transaction fees.
Miners perform billions of calculations per second in order to verify new transactions. They do these calculations before their are rewarded for their work.
The network is secure even if not 100% of bitcoin miners are reliable. Bitcoin mining is still consuming a lot of energy and resources, but with time they will decrease.
In the early days of bitcoin everyone was able to be a miner by simply using their computer’s CPU. Since more people joined, it is more competitive and requires specialised hardware.
Security, Security, Security
The technology behind Bitcoin is pretty secure. This is indeed the biggest distributed network in the world.
Unfortunately, there is still a risk. Its vulnerability lies in the “wallet” files. They could be lost, stolen or accidentally deleted. This is pretty much the same as cash or online credit card theft.
Can it be secured?
Fortunately, users can employ practices to secure their exposure. A few of the important practices to consider when trying to protect your wallet from an online breach are:
- Keep Only Small Amounts of Bitcoins on Your Computer, Mobile or Server
- Backup Your Wallet Regularly
- Encrypt Your Wallet/Smartphone
- Remember Your Password- Keep A Paper Copy
- Use Strong Password (at least 16 characters long)
- Keep Software Up-to-Date
- Multi-Signature Transaction
Useful Resources:
Test Buying/Selling Bitcoins or Other Cryptocurrencies
Open Live Trading Account for Cryptocurrencies
Khan Academy- Learn More About Cryptocurrency
Let’s Take a Deeper Look Into Bitcoin’s Design
In this part, I will walk you through some of the essential components without which Bitcoin will not be what it is. These are:
- Blockchain
- Bitcoin Transactions
- Bitcoin Transaction Fees
- Bitcoin Units
- Bitcoin Mining
- Bitcoin Supply
- Bitcoin Wallets
- Bitcoin Acceptance by Merchants
- Bitcoin Acceptance by Non-Profits
Blockchain
Blockchain technology created the backbone of a new type of internet. It was initially developed for the Bitcoin.
Now the tech community is finding other potential uses for it.
In the words of the authors of the Blockchain Revolution (2016) Don and Alex Tapscott:
Blockchain is a ledger. It records all bitcoin transactions. The blockchain is a distributed database– to achieve independent verification of the chain of ownership of any and every bitcoin amount, each network node stores its own copy of the blockchain.
On average, six times every hour a new block is added to the blockchain. This allows bitcoin software to determine when a particular bitcoin amount has been spent, which is necessary in order to prevent double-spending.
Units
Bitcoin. This is the unit of the bitcoin system:
Bitcoin Transactions
A transaction must carry the digital signature of its owner. A transaction can carry multiple outputs, allowing you to make multiple payments in one go. Like when paying with cash- the sum of inputs can exceed the intended payment sum. In such cases an additional output is used and the change is returned to the payer.
Bitcoin Transaction Fees
Optional. Miners choose which payments to prioritise and usually these are the highest payers. The higher the storage requirement, the higher the fees that are paid.
Mining
Record-keeping! Each block contains a cryptographic-hash of the previous. They are linked by SHA-256 algorithm giving its blockchain name.
The block needs to be accepted by the rest of the network. To do so, a block must contain a PROOF-OF-WORK.
Proof-of-work requires miners to find “nonce”.
Remember: “Nonce” is an arbitrary number that can only be used once.
This is an easy, but very time consuming chain of events to accomplish.
The proof-of-work system together with the chaining of blocks, makes modifications of the blockchain extremely hard. A hypothetical attacker must modify all subsequent blocks in order for the modifications of one block to be accepted.
New blocks are mined all the time. As time passes, this makes it very difficult to modify a block and the number of subsequent blocks (also called confirmations of the given block) increases.
Bitcoin Supply
21 Million Bitcoins. How will this number be reached? Bitcoins (all of them created so far) have been created through coinbase transactions.
The bitcoin protocol says that the reward for adding a new block will be halved every 210,000 blocks. This is on average every 4 years.
The limit of 21 million will be reached approximately in 2040 and then the rewards will disappear. The only reward left then will be the transaction fees.
Bitcoin Wallets
It’s a storage. Wallets store the digital credentials of your bitcoin holdings. Two cryptographic keys are generated. One is public and traceable and the other one is private.
Types of Wallets
-Software wallets- software wallets are subdivided into : a) Full Clients and b) Lightweight Clients
-Online Wallets
-Physical Wallets
Bitcoin Acceptance by Merchants
More and more merchants are accepting bitcoins. Credit cards usually charge 2-3%, merchants accepting bitcoins usually charge 0-2%. A few of the big names that started accepting bitcoins in 2014 are:
PayPal
Microsoft
Steam
Dell
Expedia
Time Inc.
Bitcoin Acceptance by Non-Profits
The first university in the world that started accepting bitcoins was the University of Nicosia. It also started offering a digital currency degree programme to its students. A few non-profit organisations that started accepting bitcoins are:
Mozilla Foundation
Democracy Now
Greenpeace
Wikimedia Foundation
