What Is Bitcoin? A Beginner's Guide
The Bitcoin world is buzzing with both excitement and curiosity and the opportunity for the potential to skyrocket. Everyone from everyday Joes to reputable experts bets on Bitcoin's success.
It has been 8 years since the release of Bitcoin. Most notably, we saw headlines of people who happened to buy bitcoin early on turning into child millionaires. Given the enormous potential of new cryptocurrencies, our attention often turns to Bitcoin as the quintessential example of what's to come.
We've designed this guide to teach you about Bitcoin so you're up to speed and ready to enter the crypto world.
What is Bitcoin?
Released as open source software in 2009, Bitcoin is often credited as the world's first cryptocurrency and is best defined as a digital currency that exists only electronically.
Bitcoin is decentralized, which means it has no central issuer or political organization that controls the amount of bitcoins in circulation. But the Bitcoin platform is far from anarchy.
The whole process is quite simple and organized: Bitcoin holders can transfer bitcoins through a peer-to-peer network. These transfers are tracked on the Wikipedia blockchain, commonly known as a giant ledger. This ledger records every bitcoin transaction ever made. Each contiguous block in the blockchain is built on a data structure based on an encrypted Merkle tree. This is especially useful for detecting fraudulent or corrupt files. If a single file in the chain is corrupted or deceptive, the blockchain prevents it from corrupting the rest of the ledger.
Instead of relying on the government to print new money, Bitcoin's blockchain programming processes when bitcoins are created and how much is produced. It also keeps track of where the bitcoins are and ensures the transactions are correct.
There are currently about 17 million bitcoins in circulation. There is no central regulator or government that controls the supply of bitcoins, meaning the supply is controlled by design. The total supply ever created is capped at 21 million bitcoins.
This limit makes an argument that Bitcoin may have scaling problems. However, since Bitcoin is essentially infinitely divisible (meaning a user can transfer as little as 0.00000001 bitcoin), this doesn't really create a scaling problem. The magic number 21 million is arbitrary.
It is believed that Bitcoin was designed to be a deflationary currency to counter the government's use of inflation as a hidden tax to redistribute earned wealth. Many people praise Bitcoin for empowering the people by overthrowing the money-printing power of fleeting politicians.
How does Bitcoin work?
One of Bitcoin's most appealing features is its ruthless verification process, which minimizes the risk of fraud. Since Bitcoin is decentralized, other volunteers are known as existing miners. Once a specific amount of transactions is verified, another block is added to the blockchain and business continues as usual.
What is mining?
Instead of a single central server verifying every transaction, essentially everyone else on the network verifies each transaction.
Bring out the miners.
Let me simplify the process so that we all understand: Miner is presented with a complex math problem and is the first to solve the math problem adding blocks of transactions already verify in the ledger. Calculations are based on Proof of Work (POW) or proof that a minimum amount of energy has been used to get the correct answer.
No real human hunches over a calculator with a notepad and a calculator doing pre-calculations; hardware used to perform Bitcoin mining.
Bitcoin's built-in reward system compensates successful miners with an amount of bitcoin. Bitcoin’s programmatic time-varying rewards and block rewards halve every four years. The current reward for each new block of verified transactions is around 12.5 bitcoins.
Mining processes have become increasingly sophisticated. The most common method uses ASICS Application-Specific Integrated Circuits. ASICS are hardware systems similar to CPU computers built for the sole reason of bitcoin mining.
Bitcoin mining takes a lot of work and power, and the amount of fierce competition makes it very difficult for newcomers to enter the race and make a profit. A new miner not only needs sufficient computing power and knowledge to use it to outmaneuver the competition, but also the large capital needed to finance operations.
A simple Bitcoin transaction example
While the underlying technology of Bitcoin may seem elusive, using Bitcoin is not that difficult. Here is an example of a simple real-world Bitcoin transaction.
Bitcoin Wallet: How to Store Your Bitcoins
So you've got this digital currency. You really can't chuck it in your pocket. Let's go over some useful definitions before we jump into crypto storage:
Exchange platform: where you trade coins for cryptocurrencies like Bitcoin, Ethereum or Litecoin. You can also trade another cryptocurrency.
Wallet Platform: basically a bank account where your cryptocurrencies are kept.
Hardware wallets: online offline wallets that are not linked to the network.
Public cryptographic key: your account number. Similar to how someone would deposit money into your bank account through your account number, your public cryptographic key is the information you give someone to receive cryptocurrency.
Private cryptographic key: a key that allows you to spend Bitcoin and other cryptocurrencies. You protect this with your life. If someone has access to it, they can transfer (steal!) your Bitcoins.
Now that we've covered that, we can discuss better Bitcoin wallets.
When you hear about bitcoin being hacked, you've probably heard about a hacked network exchange. Since Bitcoin's blockchain structure makes it difficult to hack (there are no borders), it is considered very secure.
Exchanges, however, are a different story. Perhaps the most notable Bitcoin exchange hack was the Tokyo-based MtGox hack in 2014, where 850,000 bitcoins worth over $350 million suddenly disappeared from the platform. This does not mean that Bitcoin itself was hacked; it just means that the exchange platform has been hacked. Imagine a bank in Iowa was robbed: USD was not robbed, the bank did.
The industry surrounding Bitcoin is new and not without their kinks. Respected Bitcoin advocate and venture capitalist Marc Andreessen states, “Mtox must die for Bitcoin to thrive.” Its previous role from Bitcoin's early days has been replaced by better, more powerful entities.
Although most wallet platforms are considered extremely secure, the prospect of hackers leaves many users paranoid.
That brings us to hardware wallets. Hardware wallets are essentially USBs that allow users to store cryptographic keys offline and disable exchange. Your cryptographic keys only exist on your hardware wallet and cannot be hacked (unless someone physically steals your hardware wallet).
Hardware wallets are so secure that there are countless stories of people accidentally misplacing hardware wallets full of crypto and never being able to recover thousands, hundreds of thousands, or millions of bitcoins.
Some users opt for a user paper wallet, which is essentially your cryptographic key on a piece of paper stored somewhere safe like a bank vault. While paper wallets are not recommended, they can be done using an online key generator (not recommended due to malware threats) or handwritten.
Why use Bitcoin?
Bitcoin is often hailed as the future of the monetary world for several reasons.
It is decentralized and gives power to the people. Launched just a year after the 2008 financial crisis, Bitcoin has attracted many who consider the current financial system unsustainable. This element has won the hearts of those who view politicians and governments with suspicion. No wonder there is a large community of active thinkers building, buying, and working in the crypto world.
Freedom. The concept that one person can carry millions or billions of dollars of Bitcoin across borders, pay for it at any time and without waiting for bank delays is a big selling point.
Protect. Bitcoin payments are not necessarily tied to a person's personal information. Since personal information is removed from transactions, users do not face threats such as identity theft. Bitcoins can also be backed up and encrypted to keep your funds safe.
Low transaction fees. Banks and companies like PayPal charge fees to send and receive money. Bitcoin replaces the 2.5% transaction fee on the social network with a fraction of a fraction.
The ledger is immutable. Bitcoin's blockchain public ledger is objective. People trust it to be fair because it is based on pure math, rather than human error and the corruption of questionable politicians.
What are the downsides of Bitcoin?
For all its advantages, Bitcoin still poses some important problems.
Perhaps one of the biggest reasons people haven't jumped on the Bitcoin train is because its price is shrouded in uncertainty. Many people are interested in the problem
Legal gray area. Governments have largely remained on the sidelines, and this has created both a sense of potential and apprehension among Bitcoin proponents and critics respectively. Bitcoin is not backed by a regulator and the government would technically cede power by supporting a decentralized currency. This has largely been officially unresolved. However, the price of Bitcoin tends to be very sensitive to any news regarding the US government's stance on the cryptocurrency. For example, when the SEC refused to approve bitcoin-based exchange products' bitcoin-backed assets on the stock market in 2017, the price of Bitcoin fell by 18%. However, while Bitcoin price and adoption will be affected by government action, governments cannot criminalize Bitcoin. In fact, governments like the United States and China have invested in it in some capacity.
Hacking exchange. As noted above, an exchange hack has nothing to do with the integrity of the Bitcoin system, but the market is not normal. This trend seems to diminish as users see that the cryptocurrency recovers from exchange hacks. As the exchange grows and becomes more secure, this threat becomes less of an issue. In addition, external investments in exchanges are providing capital for them to thrive.
Creditial. This is mainly due to Bitcoin's $47 market cap but it still makes users sweat. It's very likely that the Bitcoin price will plummet and you can't act, but that's still nothing to worry about. However, as more investors invest, liquidity becomes a negligible risk, as there will most likely always be Bitcoin buyers waiting.
Volatility. This very reason that many speculators are attracted to Bitcoin is also the reason many potential users hesitate to join. Users who view Bitcoin as a speculative investment option are essentially gambling on the process, and the future Bitcoin price is largely unknown. There are estimates that both Bitcoins will be worth a coin in a few years, while some predict that one bitcoin will be worth $500k in three years. As new investors continue to invest and the market cap increases, the price of Bitcoin may become more stable.
Lack of acceptance by businesses. Price volatility is a big reason that many businesses are still not accepting Bitcoin as a form of payment. Increased consumer acceptance and price stability will eventually mitigate this drawback.
Another downside is that while many people have heard of Bitcoin, few understand exactly what it is or how it works. Instructions like these help push the needle and build the foundation, but the user will eventually learn more information.
Bitcoin's strength lies in its network effect. The more we spread and grow the Bitcoin community, the more our bitcoins will benefit.
How to buy Bitcoin
As mentioned above, in the early years of Bitcoin, it was difficult to find a reliable place to buy cryptocurrency. With the increase in demand for Bitcoin, many new companies have sprung up to help make it easy to buy Bitcoin.
These days, many Bitcoin exchanges have received large investments from venture capitalists. They are also more heavily regulated now, especially those living in the United States. You can compare exchanges and check out our in-depth reviews in our Bitcoin Buying Guide. We've also listed our top two recommended options below:
Coinbase launched in 2012 with the hope of giving users an easier way to buy Bitcoin. Since its launch, the San Francisco-based startup has become the most popular recommended purchase choice for newbies. You can learn more in our complete Coinbase Review and User Guide.
Gemini was founded in 2015 by Tyler and Cameron Winklevoss. While they launched more recently than many of their competitors, the New York-based crypto exchange has quickly established a great reputation in the crypto community. You can learn more in our Gemini Review and User Guide.
Who Invented Bitcoin?
Satoshi Nakamoto is credited with designing Bitcoin. Nakamoto claims to be a man living in Japan born on April 5, 1975, but there is much speculation that he is actually an individual programmer or a group of programmers with expertise in computer science and computer science. ciphers scattered throughout the United States or Europe.
Nakamoto is credited with creating the first blockchain database and the first to solve the double-spending problem that other digital currencies have failed to do. While the creator of Bitcoin is shrouded in mystery, his Wizard of Oz status hasn't stopped the digital currency from becoming increasingly popular with individuals, businesses, and even governments.
It's important to look at Bitcoin's popularity over time because well, see below:
Search volume for Bitcoin Bitcoin Bitcoin. The value 100 is the highest prevalence.
Google Trends structures the chart to show relative search interest to the highest points in the graph. A value of 100 is the highest popularity for the term “Bitcoin” and a value of 50 means it is half as popular at the time. A score of 0 indicates that the term is less than 1% as popular as the highest. It's amazing how Bitcoin-related searches have spiked over the past few years.
When Bitcoin started circulating in 2009, its early adopters included programmers and a niche group of technical people. Its popularity over time suggests that many of Bitcoin's downsides are likely to disappear as Bitcoin becomes more standardized.
Not surprisingly, the price of Bitcoin has increased with increased demand. As you can see, more buyers enter the market and increase in price as more people learn about Bitcoin and its technical applications.
Bitcoin's popularity is undeniably its number one advantage over many other cryptocurrencies. By gaining a large number of adopters and users, Bitcoin has achieved a network effect that attracts even more users. Users who will invest more in a relatively unknown and unproven digital currency will be assured by Bitcoin's performance over time, its growing community, and the fact that people they know are using cryptocurrency.
Bitcoin's early advantages, popularity, and network effects have cemented it as the most popular cryptocurrency with the largest market cap. Rivals like Litecoin may have many technical advantages over Bitcoin's algorithm (see more about that here), but they hold only a fraction of Bitcoin's market cap and their waning community is largely Weaknesses include Bitcoin loyalists, speculators, and anti-Bitcoin buyers.
What we can learn from Bitcoin's popularity
Understanding what makes Bitcoin so popular allows us to not only conceptualize where Bitcoin is headed, but also how other cryptocurrencies work. Bitcoin has the ability to attract users better than any other cryptocurrency because
It has a network effect. Bitcoin's network validates its value to newcomers and gives Bitcoin viral growth.
High market cap is comfortable. Bitcoin's huge market cap gives users a sense of security and stability since it's harder to manipulate and less prone to drastic price swings. With a market cap of over $100 billion, Bitcoin is relatively a much safer crypto investment.
Quantitative speculation. Many Bitcoin users are holding onto their bitcoins in hopes of selling them for a huge profit one day. With news articles describing Bitcoin millionaires as lucky kids getting in early, you can't really blame them. For example, if you spent your $5 bucks on 2,000 bitcoins one morning in 2010, they would be worth about $5.4 million today. Makes you really wish you were better at managing your Starbucks budget, right?
News promotes attention, and attention promotes understanding. While many people flock to cryptocurrencies purely in search of financial gain, there are many who are simply curious. Some people are sticking around and trying to understand what cryptocurrencies are. While more users increase Bitcoin's network effect, more people form cryptographic insights that also strengthen the active Bitcoin community.
Bitcoin is still a relatively young currency but it has achieved significant user adoption and growth. Bitcoin's network only grows stronger as more people learn about Bitcoin's underlying technology and potential in relation to other methods of storing value.
As the flagship of the crypto fleet, Bitcoin is considered the “Gateway” cryptocurrency. Understanding Bitcoin's potential is an essential first step to seeing great solutions being implemented in the crypto world.
Bitcoin paints a future that is vastly different from today's fiat-based world. This is interesting or unsettling for the vast majority. Equip yourself with the best resources possible. Become active in communities that further explore not only the technical applications of Bitcoin and other cryptocurrencies but their shared potential to disrupt virtually any market. Hug yourself. Cryptocurrencies are coming.