Bitcoin is the first cryptocurrency that paved the path to the thousands of cryptocurrencies that have sprung after it. Nearly everyone today has heard of it as Bitcoin’s unbelievable ups and downs regularly make their way to the media. That’s what makes Bitcoin a high risk-high reward investment which is not for the faint-hearted. Calling it a store of value would be tricky as its value changes all the time.
So, what is Bitcoin?
Bitcoin is a decentralized digital currency that you are able to buy, sell and exchange directly with others, without an intermediary such as a bank. The creator of Bitcoin is anonymous and goes by the name of Satoshi Nakamoto. His aim was to create a financial system that did not rely on trust but on cryptography.
All the Bitcoin transactions that have ever been made are included on a publicly accessible ledger that everyone can look into, making transactions nearly impossible to reverse or to fake. That’s actually part of what gives this asset value: Since Bitcoins are not transmitted through a centralized system such as a bank, one needs to easily verify that a transaction has indeed taken place.
And just like with other assets, such as gold, people decide on its value.
Since its launch in 2009, Bitcoin has experienced a substantial rise in value. Although it was once sold for a few dollars per coin, in 2021 it reached a price of around $65,000. Due to the fact that its supply will be capped at 21 million coins, many expect its price to only keep going up with time, especially as more and more large institutional investors start treating it as a kind of digital gold through which they can hedge against inflation.
We’ve also created this tutorial on how to buy it with a debit or credit card.
After going through the top exchanges in the world, we came to the conclusion that Binance’s process is the most seamless one of all.
How does Bitcoin work?
Bitcoin is built on a distributed digital ledger known as a blockchain. The blockchain is an enormous body of linked data, that consists of separate units called blocks. Each block contains information about all the transactions that have taken place, with details such as date and time, total value, buyer and seller, and a unique identifying code for each transaction. The blocks are strung together in chronological order. The transactions are accessible to anyone which makes this digital ledger public.
However, the main piece of information that is missing are the names of the sender and the receiver as they are merely represented with long strings of numbers and letters. The same applies to the transactions. The randomness required for every transaction reduces the risk of someone making fraudulent Bitcoin transactions immensely. You should also know that Bitcoin transactions are not instantaneous and can actually take quite some time. Since each transaction goes through the manual verification performed by miners, it could take up 20 minutes to see your Bitcoin in your account.
Blockchain is decentralized, meaning that it is not controlled by any a single entity. It doesn’t belong to anyone but it can get enhanced when updates suggested by developers get approved by the majority of the miners that sustain the system.
How Does the Bitcoin Mining Work?
Mining is the process of including new transactions onto Bitcoin’s distributed ledger. Those who mine Bitcoin utilize a process called proof of work, which involves the deployment of powerful computers engaged in solving mathematical puzzles that verify Bitcoin transactions.
In order to incentivize miners to keep racing to solve the cryptographic puzzles and support the whole system, the Bitcoin code rewards them with newly created Bitcoins. Mining serves two purposes – it creates new Bitcoins and new transactions between the Bitcoin owners are added to the blockchain.
In the very beginning, it was possible for the average Joe to mine Bitcoin with their own computer at home, but that’s no longer the case. The Bitcoin code is written in such a way that makes solving its puzzles more and more challenging over time, requiring increasing amounts of computing resources. It has now reached the point where Bitcoin mining requires not only powerful computers but also access to cheap electricity to be successful. That’s why mining is primarily done in countries such as Iceland where electricity is cheaply produced.
It is estimated that by 2140 all Bitcoins should have entered circulation. The process of mining will not unlock any new coins, and from this point on miners will have to rely on earning from transaction fees instead.
How to Use Bitcoin
Most people tend to use Bitcoin as an alternative investment, just like they would invest in stocks and bonds. You can also utilize Bitcoin to make purchases, however, the number of vendors that accept the cryptocurrency directly is still limited. The good news is that there are plenty of services that allow you to spend your crypto via debit or credit card.
Some big companies, including airlines, accept Bitcoin. Local retailers may accept it as well but that’s oftentimes not the case. That being said, PayPal announced that it will make purchases with crypto possible by automatically converting crypto holdings to fiat currency for their users.
You are also able to use a service that allows you to connect a standard debit card to your crypto account, allowing you to spend your Bitcoin in a way, similar to using a credit card. This also involves a financial provider that can instantly convert your Bitcoin savings into dollars or euros (hint – Binance are issuing debit cards for anyone who’d like to spend their crypto).
In other countries, especially those with less stable national currencies, people sometimes use Bitcoin or other cryptocurrencies as a store of value instead of their own currency. In 2021 El Salvador even adopted Bitcoin officially as a currency, becoming the first world in history to do so.
When a government’s policies or the global economy lead to the devaluation of fiat money, then cryptocurrencies turn into a hedge against this threat. Bitcoin is extremely valuable in countries such as Venezuela, Argentina or Turkey where they are experiencing unprecedented levels of hyperinflation. The volatile nature of Bitcoin is less of risk to them compared to holding their money in their own national currency.
In some countries there are tax implications for using Bitcoin so you’d need to get familiar with them as well.
How to Buy Bitcoin
Most buy Bitcoin through exchanges, such as Binance. There, you are able to buy, sell and hold cryptocurrencies as setting up your account is similar to having a brokerage account. You would need to verify your identity and provide the source of your funding. The greater the quantity of money you’d like to trade with, the more information about you would be required.
Some of the major exchanges include Binance, KuCoin and OKEx. While an entire Bitcoin has become expensive to purchase, you can actually buy fractions from it. In fact, the smallest unit of Bitcoin, the Satoshi, is one hundred millionth of a single bitcoin.
You’ll also need to take into consideration the buy/sell order fees, which are pre-determined percentages.
Investing in Bitcoin
Just like with stocks, many people buy and hold Bitcoin as an investment. People’s philosophies when it comes to the way to invest vary greatly. While some buy and hold for the long term (also known in the crypto-community as ‘hodling’), others may trade on a daily basis with it or use their Bitcoin to purchase other cryptocurrencies. The price of Bitcoin tends to experience enormous price swings, going as low as $5,165 and as high as $28,990 in 2020 alone.
If you decide to take your Bitcoin out of the exchange (which is a good idea when you are planning on keeping it for a long period of time), you would need a digital wallet in which to store it. You can use either a hot wallet or a cold wallet for this. A hot wallet (which is essentially an online wallet) is stored in the cloud. Some of the online wallet providers are Mycelium, Exodus, and Electrum. A cold storage is an offline device used to store Bitcoin or other cryptocurrencies and it is not connected to the Internet. Therefore, it is even more secure since it’s impossible to hack. The most famous offline wallets are perhaps Trezor and Ledger.
And that’s it! Hopefully, you now understand Bitcoin, its technology and how to use it far better!
Nothing on this website should be perceived as financial, investment or trading advice. We urge you to do your own research prior to investing and we highly recommend that you consult a certified financial advisor.
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