What is Bitcoin? Ultimate guide for beginners to get started with Bitcoin as a Cryptocurrency
There are two reasons you landed on this article interest and curiosity. Interest for those who already know what is blockchain and cryptocurrency and want to expand this knowledge. Curiosity for those who don’t know anything about this and want to begin right away. Either way, you’d have questions like what is it and how can it change your life.
In this post, you will be learning everything about Bitcoin that you need to begin with. As part of this post, we will be covering the following:
What is Bitcoin? Who created it?
What is blockchain?
How does Bitcoin work? What is it used for and how to use bitcoin?
Pros and Cons of Bitcoin
What is Bitcoin mining?
Final thoughts on bitcoin
Without taking further time, let’s dive in.
What is Bitcoin? Who created it?
Bitcoin is a digital currency that runs on a blockchain and has a P2P architecture. It is also referred to as virtual currency by industry experts.
For those who’re unaware, the internet has taken over on almost all aspects of our lives, including financial systems. And we’re not talking about internet banking, it’s beyond that. Bitcoin is a virtual currency, that is, it doesn’t exist in the real world. In other words, it is not a physical currency like the fiat currency we use right now. You cannot touch or feel it.
It was 2008 when an anonymous developer Satoshi Nakamoto came up with a P2P currency payment system that eliminates middlemen that charge us and still take at least one day to reach the recipient.
Satoshi Nakamoto emailed cryptographic mailing list with this idea and also shared Bitcoin whitepaper with the community. Since then, Bitcoin hasn’t stopped and looked back since then. No one knows who is Satoshi Nakamoto or since when he/she is been working on this idea of Bitcoin.
That was on how it all started, but what exactly is Bitcoin?
For time being forget that Bitcoin is a cryptocurrency or even a currency. Consider it as a system, a software that is exchangeable directly between two users without any middlemen.
Imagine this system as an instant messaging app like WhatsApp or FB messenger. Person A sends an instant message to person B. The message that is exchanged between the two peers are directly delivered and no one can read those messages.
Coming back to Bitcoin and now you can unforget that Bitcoin is a currency. This system that we are/were using has a couple of problems that have been like the dust in the eye. Let’s have a look at it in brief.
Problems with the current financial system
Centralized system: The traditional financial system has everything stored in a central system that is vulnerable to downtime. One system goes down and everything else follows. Furthermore, there’s always someone watching you and your activities. Either the government or the system owners itself.
Time consuming: The traditional system has a lot of middlemen, both because of laws and technology dependency. Instead of owning certain technological assets, many financial bodies outsource it to third parties. Since a lot of middlemen are involved in this, the time for the recipient to receive the funds increases.
High fees: When you make an international transfer or even a local transfer, the amount you deposit is simply updated in the system, it is not actually deposited in the receiver’s bank account. In other words, the account balance is ‘digitally’ updated and to do this, heavy fees are laid on the users.
Privacy: When was the last time you got a promotional call from banks? Must be recent encounter right? Apart from your contact details, your financial details are also accessible. Almost everyone in the financial firm can access your personal, financial and contact details anytime. Though there are strict rules laid by the firms for dealing with the data, bad intention does not understand such rules.
Security: When things are controlled by one person or small group of people, chances of a security breach is high. The traditional system has a single point of failure, one attack on the system and everything the servers has is compromised.
The problems can go on and on, forever. Now that we have a better option it’s time to switch to that. The major difference between the traditional payment system is that cryptocurrency is a decentralized system and the traditional system is centralized. Bitcoin, as a cryptocurrency is a part of decentralized peer to peer payment system.
Note: Bitcoin is called as a cryptocurrency because it is a piece of code that implements cryptography.
Now that you know about what is Bitcoin, let us get ahead and see how it works.
What is Blockchain?
The blockchain is an open source public ledger system that maintains transactions of cryptocurrencies. It is like a database that contains records of cryptocurrency transactions in reverse order, i.e. the latest record will be at the top. This public ledger consists of a history of transactions since the beginning of the cryptocurrency. Each cryptocurrency has their own blockchain with a history of transactions. Take a look at the Bitcoin blockchain for better understanding.
A group of transactions for a block which the miners verify using their computer power that runs a cryptographic algorithm that further generates a hash of each transaction. Once the hash is generated, that transaction is marked as ‘verified’ and then it is added to the public ledger. Each block is connected two other blocks, one before it and one after it, hence forming a chain. The chain is public and can be accessed by anyone with an internet connection. The blockchain is big chunk to explain which we have shared in the previous post in detail and hence we would recommend you to go there for detailed understanding.
How does Bitcoin work? What is it used for and how to use bitcoin?
Any cryptocurrency, in this case, Bitcoin is a digital currency or a piece of code worth $6388. That is, each bitcoin is worth $6388 US dollars. So if you want to pay someone $6388, you can simply pay that person 1 Bitcoin(symbolically represented as BTC). Advantage? That person will receive the amount within minutes, instead of hours or days if it is a international transaction.
So you can buy Bitcoin from an exchange, just like you stocks/equity. You can even imagine bitcoin or any cryptocurrency for that matter, as stocks/equity that can be used to pay for goods/service.
Once you buy it, you can store it in either in digital wallets or exchange itself. However, we recommend you to store it in a digital wallet that are absolutely free. Each wallet has a unique alphanumeric address and you can generate any number of addresses from within your bitcoin wallet. Not keeping it complicated, BTC is a digital currency that you buy it unlike the fiat currency which you earn it.
As far as trading in concerned, BTC or cryptocurrency as a whole, has made it a lot more easier, faster and trust worthy. And the decentralized nature of blockchain technology that runs the cryptocurrency makes sure that your funds are safe, your information is private and your time is saved. Since these transactions happen over the internet, it doesn’t take much time for the funds to reach the destination.
Currently, not everyone accepts bitcoin as payment due to various of reasons. Few countries have banned cryptocurrency while in some countries, people are buying Lamborghini with their Bitcoins. Cryptocurrency still has a lot of work to do to completely take over fiat currencies, a lot of regulations to pass as illegal activities are being carried out using cryptocurrency. People misuse the privacy offered by blockchain technology to deal in the black market, illegal products. This is the main reason why people fear that cryptocurrency will not survive longer. But Bitcoin is here to stay, though it will take time but fiat currency have their days numbered.
Pros and Cons of Bitcoin as a cryptocurrency
You’ve already seen problems that our current financial system has. Now, to convince you better, we have below mentioned the pros and cons of using Bitcoin (or any cryptocurrency):
Fast yet lower fees: Bitcoin is a internet money and it is delivered via the internet hence it is reliably fast. However it depends on the hash rate & block size of each blockchains that makes the difference in time take for the funds to reach the recipient. In this case, bitcoin has a block size of 1MB and hash rate is 6 transactions per hour. Which is way too low that almost every cryptocurrency available in the market today. Block size is like the RAM of blockchain, higher the block size faster is the transactions. Furthermore, depending on the block size, the hash rate would vary. Higher block size would simply mean more transactions per block and more transactions being verified by the miners. Talking of fees, bitcoin has varied fee structure depending on the hash rate. Recently, a transaction worth $300 million was made for the fees of 4 cents.
Private & Secure: The core essence of a blockchain is privacy, absolute privacy to be precise. If you look at any transaction of any blockchain, you wouldn’t understand anything. You wouldn’t even be in position to decode the value mentioned about a transaction. Take a look at this transaction and try figuring out transaction details other than amount transferred. Try to figure who has sent this to whom and from where to where etc. Found anything? That’s the beauty of blockchain, it’s 100 private and no one can figure out about the transaction details. However, many criminal are misusing this feature to trade illegal goods in the black market. This misusing is the biggest challenge that cryptocurrencies have to solve. Furthermore, the blockchain is not hackable as is it a distributed network and doesn’t have a single point of failure, unlike the traditional financial system. The digital wallets, exchanges are the ones that are hacked and the funds are being stolen from them. If the developers come up with a way to keep this out of the network, nothing can stop cryptocurrency from replacing itself with fiat currency.
Global: You can send funds to literally anyone on the planet. He/she just need to have a bitcoin supporting wallet and should have a receiver's address. You need to feed the receiver’s address and the amount you want to transfer and tap send. Make sure you have enough balance in your wallet to avoid transaction failure. In minutes of time, the recipient will have the funds in their wallet which they can use as it or exchange it for fiat currency. There are so many cryptocurrency exchanges that are reliable and regulated by the authorities like Coinbase, cex.io, binance, kucoin, coinexchange, changelly, bitfinex, & gate.io.
Irreversible: Once the transaction is confirmed by the miners and is added to the blockchain it cannot be reversed. Once its gone means it’s gone. Be double, triple sure of the address you want to send the funds to. Its a 30 character alphanumeric address that have a huge chance of going wrong. Best thing you can do is create a QR code and share that with the person you want the payment from. Since the address is generated by the system, you can simply copy and create a QR code. Almost all modern day wallets have QR code for the address you create by default so that’s not a problem. If you are using wallet that do not have this functionality, use this tool to generate the QR code of your payment address. Choose ‘text’ option to and then paste the payment address which will generate the QR code for you.
Security breaches: Technology comes with its own problems. Cryptocurrency is gray zone in many countries and some have completely banned it. The reason? Cyber crime and frequent hacks on exchanges and digital wallets. Nothing is safe online, though cryptocurrency ensure the privacy of your funds and information. The exchanges you choose to store your funds are not safe, their system is a traditional system after all, it has a single point of attack and hence it fails easily. Platforms including exchanges and digital wallets are vulnerable to cyber attacks and your funds are not safe there. Solution? Use hardware wallets like Ledger Nano S and Trezor to store your funds. It’s absolute hack free as it doesn’t connect to the internet. The device connects to the internet only to transfer funds from the exchange to the hardware wallet that in a super secure environment.
While you read all this, did you get one question? A basic one? How do Bitcoin come from or how are they generated? If you had this question, you seriously are awesome as you’ve read this post with sheer interest. If not, it’s okay let’s have a look right away.
What is Bitcoin Mining?
This is a two in one process crafted by Satoshi Nakamoto. Must be to save time and energy and fasten the process of circulating the Bitcoins in the market for use. First, let us explain the verification process of Bitcoin. When someone makes a transaction, the raw data of it is added to the blockchain as ‘unverified’ status. Then a group of people who spend their time and energy, verify these blocks by running those transactions in a cryptographic algorithm. The algorithm generates a hash of that transaction(algorithm runs certain checks and then passes it if met). Once the hash is generated and a block is added to the public ledger or the blockchain, certain number of Bitcoins are generated in this process.A small portion of this is given to the miners as reward for their time and effort. Every 210,000 blocks or roughly every 4 years, the reward is halved. In 2009, when it all started, the reward was 50 BTC per block. In 2014, the reward was halved to 25 BTC and now in 2018, it’s 12.5 BTC per block that’s verified. There is no cap on how many blocks that can be created, but there’s a cap on number of bitcoins that can be generated. Only 21 million Bitcoin can be generate and can stay in circulation in the market. Out of which, 17 million Bitcoins have already been mined. Once the 21st millionth bitcoin is mined, the miners will be out business and will have to depend on other cryptocurrency to earn.
Final thoughts on Bitcoin as a currency
Sure, Bitcoin has a great scope right now. But the fluctuating prices has given room to a lot of hacks, heists and threats to the market. People are using the cryptocurrency as an investment and not as currency and that is why there are a lot of hurdles for the prime cryptocurrency to become the official currency of modern world.
We need to take care of a lot of things to ensure this amazing technology stays and makes a huge difference in the world we are living in. Since Bitcoin is the highest valued cryptocurrency there are a lot of hacks, robberies and cyber attacks on this cryptocurrency alone. It is very important to figure out a way to keep the cyber crime in control and increase the security of the exchanges that are holding billions of investment in their systems.
That was on Bitcoin from our side. What do you think of this technology? Have you used Bitcoin as payment mode? What was your experience of using it? Let us know in the comment section below. Also share this work among your social group to make them aware of this technology.