What Is Bitcoin?
When Bitcoin (BTC) first appeared way back in 2009, it was even more confusing than it is today. The questions “What is Bitcoin?” and “Why should we care?” were on everyone’s lips.
Over a decade later, we know we should care. If for nothing else, then because its value at the moment of writing was $34,618, and it can go either way. In the past years, Bitcoin made some headlines and some millionaires, and after a brief lull in the excitement, it’s once again getting plenty of attention.
Let us dive into the hype: We’ll touch on everything from Bitcoin’s definition to its price. Hopefully, by the end of the article, you’ll be less confused and maybe even ready to jump on board the Bitcoin train.
What Is Bitcoin?
First and foremost, Bitcoin is a cryptocurrency, but there’s no simple cryptocurrency definition, either. The general understanding is that cryptocurrencies are digital currencies backed by blockchain – a distributed digital ledger.
Bitcoin was invented by Satoshi Nakamoto. This is an alias, and we still don’t know if there’s an individual or a whole team of people hiding behind it. His invention was meant to be a digital payment method that changed the concept of money as we know it.
While the first question was hard, the answer to “What is the point of Bitcoin?” is quite clear. In the whitepaper Satoshi Nakamoto published, Bitcoin’s underlying protocol was suggested as a solution to the issues of FIAT currencies through decentralization, transparency, and immutability.
Decentralization means a significant shift from the usual handling of currency: Instead of coming from a single source, every transaction is stored on every computer in the blockchain. This so-called “peer-to-peer” system leaves no room for middlemen.
We can all agree transparency is vital for any currency. To that end, the institutions that established FIAT currencies serve to validate the transactions made with them, but this begs the following question: What is Bitcoin backed by?
The answer: blockchain. It’s a database that uses every single computer in its network to ensure that all transactions are valid. The underlying record on the blockchain can’t be altered, so you could track a Bitcoin from its origin to its current location if you wanted to.
The last significant aspect of blockchain is the aforementioned immutability. Once a transaction is logged in the system, it cannot be adjusted, modified, or tampered with in any way.
Essentially, this Bitcoin’s backup. And that level of integrity and credibility has found its greater purpose with Ethereum, the next big blockchain project after Bitcoin.
What Is the Difference Between Bitcoin and Ethereum?
Ethereum piqued everyone’s interest when it first appeared back in 2016. It’s sort of an upgrade on Bitcoin, as it allows storing data other than transaction records on the blockchain in the form of a Smart Contract – an agreement between two participants in the network set down in code. It found various uses, spiked everyone’s curiosity, and ultimately led to an expansion of Ethereum-based projects, tokens, and ICOs.
What is Cryptocurrency?
Cryptocurrency is a digital currency used for trading, purchasing goods or services, or raising money for a particular project. At the moment of writing, there are nearly 9,000 different cryptocurrencies. Bitcoin is the most popular due to its volatility and opportunity for profit.
What Is Blockchain?
Bitcoin is backed by blockchain, a database storing all the transactions made with bitcoins from when they were first created. What makes blockchain unique as a database is the fact that it’s decentralized – stored on every computer in the system.
Blockchain consists of many nodes, or actual computers, which all work together to add new information blocks. Each computer runs the Bitcoin code and stores transactions. Any machine with enough CPU can become a blockchain node, and every node maintains the database security. Thanks to this, one of the major uses of Bitcoin is making transactions that require a high level of protection from tampering.
Every computer in the network verifies every added piece of new information. Before anything gets stored in the blockchain, 51% of all computers in the network have to validate it. Any transaction that can’t be validated is dismissed, ensuring the safety of the whole database.
Once it’s a part of the blockchain, information cannot be altered or changed in any way, making this cryptocurrency incredibly secure and virtually immune to tampering.
Bitcoin miners do the math necessary to validate blockchain transactions and provide Proof of Work in exchange for cryptocurrency. Back in the day, a single personal computer would be powerful enough to solve the equation and reward its owner with new Bitcoins. Nowadays, doing the math – i.e., “mining” – takes enormous amounts of power, which has progressively made it a lot less profitable than it once was.
Nonetheless, getting bitcoins for solving math problems is still a good incentive. Mining remains a lucrative venture, particularly for those with enough money to purchase a good mining rig. And even if you don’t have your own setup, you can participate in cloud mining.
What Is Cloud Mining for Bitcoin?
For one thing, it’s the best way to try out Bitcoin mining, especially if you don’t want to buy a dozen GPUs. Essentially, you rent processing power from the cloud, thus getting a chance to share in the winnings without worrying about maintenance and hardware.
If Bitcoin continues to rise in value, cloud mining could become even more profitable. However, as with any third party in the Bitcoin world, pay close attention to what cloud mining platforms are actually offering, and make sure to read the fine print.
What Is Bitcoin Trading?
Many people have decided to skip the Bitcoin mining process and go straight to buying and selling it. The volatility of Bitcoin makes for exciting trade opportunities: Buying Bitcoin when it was at a low point only to resell it once it reaches a peak in value has made many people rich.
To start buying or selling Bitcoin, you need a wallet, which is essentially an online bank account overview. There are plenty of various wallets online, and you might find one per each cryptocurrency.
What Is Driving Bitcoin’s Price?
As with anything else, the price of Bitcoin is determined by the basic rule of supply and demand. There is a finite amount of Bitcoin out there – unlike FIAT money, you can’t print more Bitcoin on demand, and there are only 21 million bitcoins in circulation. Bitcoin halving was set up as a way to circumvent this issue.
Even with that, though, bitcoins are scarce, and can’t be counterfeited, which of course drives up their price. And the hype surrounding this cryptocurrency also serves the same goal, although less predictably, contributing to the spiky growth of Bitcoin’s price.
What Is Bitcoin Halving?
To ensure that there aren’t too many bitcoins in circulation at a specific point in time, mining rewards are set to halve once you reach a specific number of mined blocks.
How Do You Buy Bitcoin?
First, you get a wallet. Anyone looking to get in on the cryptocurrency action needs to get a hold of one. Crypto wallets are similar to regular wallets, except they hold the keys to your digital cash. In actuality, a bitcoin wallet is like an access card to the blockchain.
What Is a Bitcoin Wallet?
Some wallets accept Bitcoin only, but there isn’t such a thing as a specific Bitcoin wallet. In other words, any wallet that can store bitcoins is a bitcoin wallet. Choosing the right one depends on what you are looking to accomplish with cryptocurrency, so you should research the subject thoroughly before committing.
Wallets can also be hot or cold, depending on whether they need constant access to the internet or not. Choosing between them is mostly a practicality-versus-security matter, as cold wallets are more secure but also more complicated to access.
What Is a Bitcoin Address?
Think of your Bitcoin address as of your credit card or account number: Each crypto wallet comes with a set of keys used to make transactions via blockchain. A public key is derived from your private key and then “hashed” to create an address to which people can send you the bitcoins you purchased.
The critical thing to remember is that your bitcoins aren’t stored in the wallet. The wallet and its keys provide access to the blockchain, where all bitcoins – yours included – are.
What Is a Bitcoin Exchange?
The cryptocurrency exchange is your best bet for acquiring your first Bitcoin. Many popular cryptocurrency exchanges allow exchanging FIAT currencies for Bitcoin. A quick internet search will show that there are plenty of those that only allow trading one cryptocurrency for another, as well. Whatever your preference, you’ll find a place to trade.
Get ready to commit some time, though, since most cryptocurrency exchanges are highly regulated. It might take a while to figure out which one you could use in your country.
What Is the Best Way to Buy Bitcoin?
The safest way to buy Bitcoin is through a cryptocurrency exchange. If you want cheaper fees, you can also try to find a Bitcoin ATM. They have been going in and out of style for a bunch of reasons, but most traders agree that long processing times are offset by lower fees.
Bitcoin Denominations: Cash, Gold, and Plus
If all this variety wasn’t confusing enough, we’re here to tell you that there is more than one kind of Bitcoin. You can now find Bitcoin Cash, Bitcoin Gold, and Bitcoin Plus on the crypto market – all stored in the blockchain and based on the Bitcoin protocol, but aimed at different segments of the Bitcoin market.
What Is Bitcoin Cash?
Bitcoin Cash (BCH) was created to reduce the lag in transactions that appeared as Bitcoin grew in popularity.
Bitcoin blocks are limited to 1MB for additional security, making only seven transactions possible in a second. This limits Bitcoin’s scaling ability and has resulted in a rift between Bitcoin users, as well as the subsequent creation of Bitcoin Cash.
Bitcoin Cash is attempting to return Bitcoin to its original purpose – a form of digital cash. Bitcoin Cash has faster transactions, increased anonymity, and low-to-minuscule fees for sending and receiving the currency.
What Is Bitcoin Gold?
Once mining became too complicated and required an incredible amount of computing power, Bitcoin Gold (BTG) came to life to solve this problem.
It was meant to return the mining to the hands of regular people, instead of only those who can afford a hangar’s worth of mining servers. Namely, with the rapid evolution of mining equipment, acquiring Bitcoin quickly turned into a pay-to-win venture. It soon became impossible for every participant to mine their own Bitcoin. The creators of Bitcoin Gold are trying to even the playing field for their supporters.
What Is Bitcoin Plus?
Bitcoin Plus (XBC) is another cryptocurrency that attempts to fix some original Bitcoin issues. Despite its dubious origins – a quick scam for funding a certain developer’s vacation – XBC went through some serious changes and made a comeback as a formidable competitor to the original Bitcoin.
With a different algorithm backing it up – Proof-of-Stake instead of Bitcoin’s Proof-of-Work – Bitcoin Plus is capable of overcoming several of the original Bitcoin’s issues. Namely, with shorter block processing time, Bitcoin Plus can handle ten times as many transactions as its predecessor.
Frequently Asked Questions (FAQ)
What is a bitcoin, and how does it work?
It’s a digital currency, also known as cryptocurrency, that can be used as a payment method or for trading. It is stored on a decentralized ledger called a blockchain. The blockchain is a database distributed between all participants in the Bitcoin network to ensure transparency, security, and immutability.
Bitcoin works like any other currency for the most part. The way the transaction records are stored is the main difference. With blockchain, there is no need for any third parties, the process is transparent, the fees are minuscule, and anyone can use it.
What is Bitcoin used for?
When Mr. Hanyecz bought a pizza for 10,000 bitcoins back in 2010, it seemed like Bitcoin would become just another payment system used worldwide.
However, thanks to its incredible volatility and the limited number of bitcoins in circulation, Bitcoin has evolved into an investment opportunity instead.
How does Bitcoin make money?
The most common way is to buy it when the price drops, keep it until the price spikes again, and then sell it.
You can try cloud mining, too. Are you asking yourself, “What is cloud mining?” It’s a one-time payment for a participation contract, through which you rent mining power.
You could also earn Bitcoin through jobs that use it as a method of payment. Investing bitcoins into Bitcoin-based businesses is another potentially lucrative option.
Are bitcoins illegal?
Bitcoins are currently legal in the US, UK, Japan, and many other countries, but some countries do restrict their use or possession.
Whether Bitcoins are legal or not depends mostly on your country’s rules and regulations. The fact that some governments dislike Bitcoin can be explained simply by the threat it presents to their national currency. On the other hand, many governments consider Bitcoin a digital asset rather than currency, so make sure to check your country’s laws before buying or selling any.
Is Bitcoin still a good investment in 2021?
Bitcoin is certainly a “high-risk” investment opportunity, as there’s only a slight chance for a payoff. Doing things right takes a lot of research, and a massive part of it will remain a guessing game.
There is no way to know what is the future of Bitcoin, but some predictions state that the price of Bitcoin will reach up to $288K at some point if it continues following the current growth model. On the other hand, history tells us that it took two years for Bitcoin to bounce back from its $2000 stagnation period.
Before you decide to invest in Bitcoin – or any other cryptocurrency for that matter – make sure to do detailed research first. To accurately assess the risks and benefits before investing, you first need to understand every aspect of the answer to the question “What is Bitcoin?”. To help with that, we unpacked it all in the guide above.