Bitcoin: the phenomenon which took the world by a storm after reaching an all-time high value of around $20,000 towards the beginning of 2018.
Thanks to its price surge, Bitcoin became a word recognized from pretty much everyone – from your regular everyday Joe to experienced financial analysts and high-level executives.
However, despite having exploded in popularity and marched into the mainstream, there’s still a lot of confusion and misunderstanding behind the world’s largest cryptocurrency in terms of market capitalization.
The following attempts to shed the necessary quality on the matter of what is Bitcoin exactly and why is it so popular.
What is Bitcoin?
Bitcoin was introduced back in 2009 when an anonymous author by the name of Satoshi Nakamoto published a whitepaper called Bitcoin: A Peer-to-Peer Electronic Cash System.
The first sentence of the document outlines the author’s vision of Bitcoin and what is it intended to be:
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
Now, Bitcoin was released as open-source software and it’s credited as the very first cryptocurrency.
By now, you’ve probably heard that Bitcoin is decentralized. This means that there’s no central issuing authority or any governing political institution that controls the overall amount of bitcoin that’s in circulation.
In turn, the bitcoin network is maintained by a group of volunteer coders and it’s run by an open network of computers throughout the entire world.
The entire system which allows Bitcoin’s existence is properly organized and, in fact, fairly simple. In short, Bitcoin holders are able to transfer their bitcoins through a peer-to-peer network. Every single transfer is tracked and recorded on an immutable ledger, referred to as “blockchain.” It holds every single bitcoin transaction ever made in history. Every single “block” which is contained in the ledger is built up of a certain amount of data.
Another important thing you’d have to remember is that Bitcoins are limited in their supply. This means that once the maximum amount of bitcoins has been reached (21 million), no more will be added to the network. In theory, this makes Bitcoin even more of an attractive asset because if the demand keeps growing or even if it stays the same, the price per a single Bitcoin will increase due to the limited supply.
Bitcoin can be described as a decentralized digital currency for direct, peer-to-peer transactions, recorded on an immutable ledger called the blockchain.
How Does Bitcoin Work?
We’re going to go through the different specifications of Bitcoin’s network and the way it functions in separate posts in order to keep things more or less understandable and to avoid oversaturation.
The way Bitcoin transactions work can be easily dumbed down to the following process.
Imagine you wanted to send some of your bitcoin to your friend. First, you’d have to publish your intention and the nodes have to scan the entire network in order to validate two things:
- You have the amount of bitcoin you want to send;
- You haven’t already sent it to someone else.
As soon as this information is confirmed, your transaction will be included in the abovementioned “block.” This block will get attached to the previous one, and so on – this is where the term “blockCHAIN” comes from. None of the transactions can be altered or, in any shape or form, tampered with. That’s the beauty of it.
As the above has probably risen more questions than answers, let’s have a closer look at few of the cornerstone terms.
The Bitcoin Blockchain
Bitcoin’s blockchain is nothing but a shared record of every single bitcoin transaction which has ever been made. As we mentioned above, you can think of it as a giant, distributed ledger.
Why is it distributed? Well, because there’s no central authority running the entire ledger – it’s run by Bitcoin nodes which are tasked with containing the entire copy of the blockchain while also validating transactions based on the Bitcoin protocol.
Basically, there are hundreds of thousands of computers throughout the world which run the Bitcoin software client and validate its transactions – these are the nodes.
How is it Decentralized?
Bitcoin is decentralized – there’s no central governing authority which controls the state of the network or the issuance of Bitcoin.
Instead, this authority is substituted by a consensus among the network nodes – it’s called the Proof of Work consensus and it reveals serious differences compared to centralized systems.
Bitcoin Nodes
As you’ve probably understood by now, nodes play an important role for the entire ecosystem of Bitcoin.
These are powerful computers which run the Bitcoin software client and validate transactions. In theory, anyone can run a node – the only thing that needs to be done is to download the bitcoin software. It’s free.
You’d also have to leave a particular port open.
Some nodes are referred to as mining nodes or “miners” for short. These are intended to consolidate transactions into blocks (see above) and chain them to the ledger. The way this is done is through the process of Bitcoin mining – something, we’ve explained in a standalone post.
How to Manage Your Bitcoin: Buy, Sell, Store
Bitcoin recently celebrated its 10th anniversary. 10 years ago, the genesis block was mined. It’s safe to say that the cryptocurrency industry, in general, has come a long way since then.
It wasn’t until 2017, however, when Bitcoin and other cryptocurrencies truly caught the attention of the world. In a few short months, Bitcoin exploded in price, spiking from a little less than $1,000 to as much as $20,000. The entire cryptocurrency market followed, reaching a total capitalization upwards of $800 billion.
And while the entire 2018 has seen a prolonged bear market, causing Bitcoin’s price to tumble with as much as 80 percent, currently standing at around $4,000, the interest towards cryptocurrencies has been heavily ignited.
This begs the question, though, how do you manage them? Let’s have a look.
How to Buy Bitcoin?
There are plenty of ways you can buy Bitcoin or acquire it. We say acquire because Bitcoin can also be mined and, in theory, you don’t necessarily have to buy it to own it.
With this said, you can:
- Buy Bitcoin from a trusted online cryptocurrency exchange. That’s what most people, especially regular retail investors, do.
- Buy Bitcoin through a physical Bitcoin ATM. As odd as that may sound to you, there are currently over 4,000 Bitcoin ATMs that can be accessed in 75 countries.
- Buy Bitcoin directly from someone else through a peer-to-peer service. One of the most reputable and trusted ones is LocalBitcoins.
- Mining. As we said earlier, you can also mine Bitcoin.
Now, there are probably other ways you can get your hands on some Bitcoin as well. Technically, you can offer products or services and receive the cryptocurrency in exchange, perform certain tasks (short-term assignments) and get paid with Bitcoin, and so forth. The above, however, are the most common ones.
We’ve also created a detailed article on how to buy cryptocurrencies where you can see all the different ways you can purchase Bitcoin.
How to Sell Bitcoin?
By extension, you can use some of the abovementioned methods to sell Bitcoin as well. The most common way of selling your cryptocurrency to someone else is through a reliable online cryptocurrency exchange.
However, a lot of people prefer to do so over-the-counter or in person through peer-to-peer services such as LocalBitcoins.
How to Store Bitcoin?
Storing your bitcoins is something you’d have to consider very carefully. Based on your goals, there are different appropriate ways you can go about this endeavor.
However, let’s have a look at the most popular ways to store your Bitcoin.
Hot Wallets
Hot wallets are specific Bitcoin (or multicurrency) wallets which are accessed through the internet. They require an internet connection and can’t be accessed offline. Typically, people who want to transact with Bitcoin on a daily basis or to trade it, can take advantage of hot wallets because they are easy to use, mobile-friendly and fairly quick. However, because they require an internet connection, their security is somewhat questionable.
Cold Wallets
These are also referred to as hardware wallets. They are usually in the form of a USB-enabled device which doesn’t get connected to the internet at any time. That’s why it’s considered to be more hacker-resistant. These are suitable for people who intend to hold on to their cryptocurrencies for a longer period of time without transacting regularly.
You can take a look at our detailed article on the best bitcoin wallets for more information.
To Wrap it Up
If you’ve made it thus far, congratulations! You’re now one step closer to understanding the complexities of Bitcoin’s nature.
We’ll keep expanding our knowledge base with additional information on everything regarding Bitcoin, as well as other cryptocurrencies.
If you have any questions, do let us know in the comments below!
Images courtesy of CoinMarketCap; Pixabay