What is bitcoin? Here’s everything you need to know
Everyone who visits a crypto blog or is planning on investing in cryptocurrencies, then it is quite obvious that he would come across the word ‘Bitcoin.’
Few might be familiar with the word but may not know its true sense and hence they could get confused as to what it exactly means.
In order to avoid any kind of confusion or to be able to make your investment as profit, you must have a good deep knowledge about the cryptocurrencies, especially Bitcoin. So, here is an article that tells everything that you need to know about Bitcoin.
What is Bitcoin?
Bitcoin is among the most common type of digital cryptocurrency, i.e. it was the world’s first cryptocurrency, which is basically a form of electronic cash. It is the first decentralized digital currency, which means the system works without a central bank or single administrator. Also, Bitcoin was among the first currencies to have instant payments. No bills are required to print and no coins to mint either. It’s sometimes represented as BTC or XBT.
Bitcoins are sent from user to user on the peer-to-peer bitcoin network directly, without the need for intermediaries. These transactions are verified by network nodes through cryptography and recorded in a public distributed ledger which is known as a blockchain.
Owners of Bitcoins are anonymous. Instead of using names, tax IDs, or social security numbers, bitcoin connects buyers and sellers through encryption keys. And it isn’t issued from the top down like traditional currency; rather, bitcoin is “mined” by powerful computers connected to the internet.
You should note that the word Bitcoin. If spelt with a non-capitalized “b”, then it represents the unit of the currency.
History of Bitcoin –
Bitcoin was created in the year 2009, by Satoshi Nakamoto (This is the name given to the creator or group of creators of the bitcoin. They are as of yet anonymous.)
Satoshi’s stated goal was to create “a new electronic cash system” that was “completely decentralized with no server or central authority.” After cultivating the concept and technology, in 2011, Nakamoto turned over the source code and domains to others in the bitcoin community, and subsequently vanished. (Check out the New Yorker’s great profile of Nakamoto from 2011.)
In 2015, Bitcoin was included under ISO 4217 which does standardization for currencies.
What is Satoshi?
It’s Bitcoin that consists a unit called Satoshi, which is defined as follows –
“The satoshi is currently the smallest unit of the bitcoin currency recorded on the block chain. “
Each BTC is divisible up to 1/10^8 part. Satoshi is known as the smallest unit of a Bitcoin. It is named after its creator who is Satoshi Nakamoto.
Satoshi is a one hundred millionth of a single bitcoin (0.00000001 BTC).
The unit has been named in collective homage to the original creator of Bitcoin, Satoshi Nakamoto, who is still unknown and could in fact be more than one person as well.
The value of a bitcoin in satoshi was decided by Satoshi Nakamoto to be 100 million no later than November 2008.
On November 15, 2010, Ribuck proposed that the one hundredth of a bitcoin (0.01 BTC) be called a Satoshi. Four months later he instead suggested that the one hundred millionth unit be called an austrian or a satoshi. The name satoshi caught on, and was widely adopted thereafter.
How to Mine Bitcoin?
Mining is a process where transactions are verified and added to a blockchain. It is also the process where new bitcoins or certain altcoins are created. In theory, anyone with the necessary hardware and access to the internet can be a miner and earn income.
Mining is done by a single person or a group of people or by a company. It is done through a combination of advanced math and record-keeping.
When a person sends or receives a bitcoin (transaction) to/from someone else, then that particular network records the transaction that is taking place as well as those which were carried out for a certain duration of time, known as a ‘block’.
Now, miners, which are basically the computers that run special software, they inscribe the given transactions in a huge digital ledger, known as blockchain.
The miners thus use the specialised software as well as powerful hardware, in order to convert the blocks into a hash, which is nothing but sequences of code. Producing a hash requires serious computational power, and thousands of miners compete simultaneously to do it.
When the hash is generated then it’s placed at the end of the blockchain, which is further publicly updated as well as propagated.
How to determine the value of a Bitcoin?
As any other currency, Bitcoin is also determined by what the people would actually pay for it. So, we can say that there is also a similarity on how the stocks are priced. But that is not always the case, and here’s why –
The protocol established by Satoshi Nakamoto dictates that only 21 million bitcoins can ever be mined, out of which, about 12 million have been mined so far, so there is a limited supply, like with gold and other precious metals, but no real intrinsic value. (There are numerous mathematical and economic theories about why Nakamoto chose the number 21 million.) This makes bitcoin different from stocks, which usually have some relationship to a company’s actual or potential earnings.
Since Bitcoin is decentralised, so for controlling supply, “value” is totally open to interpretation. This process of “price discovery,” the primary driver of volatility in bitcoin’s price, also invites speculation as well as manipulation.
The Winklevoss twins, who parlayed a $65 million Facebook pay-out into a venture capital fund that made early investments in bitcoin, are now billionaires according to Fortune. So clearly by using and knowing the right value of a Bitcoin, you could in fact become a billionaire.
How to buy a Bitcoin?
Well, if you have decided on purchasing bitcoin, well then there are many digital currency exchanges such as CEX, Coinmama, Kraken, Coinbase, etc. You can not only buy and sell bitcoins, but you could also store the bitcoins.
Getting started is about as complicated as setting up a Paypal account. With Coinbase, for example, you can use your bank (or Paypal account) to make a deposit into a virtual wallet, of which there are many to choose from. Once your account is funded, which usually takes a few days, you can then exchange traditional currency for bitcoin.
Also, there are no inherent transaction fees with bitcoin, although exchanges like Coinbase typically charge a fee when you buy or sell.
Is it Legal?
It is indeed legal to buy and sell bitcoins but the entire crypto world is facing scrutiny every now and then. This is mainly because people always tend to use the currency for various illegal activities such drug dealing or other illegal goods and services.
The government including the FBI in 2013, closed down the Dark Web marketplace known as Silk Road. Similarly many enforcements are in place but somehow illegal activities tend to still take place.
What are the Risk Factors?
Much like any other currency or investment, Bitcoin surely is risky but the financial value of cryptocurrency, especially Bitcoin is highly volatile, and hence would have fluctuations on either side.
Also, there are many risks related to theft, hack and other crypto-crime activities. But a very unique feature is the fact that the transactions cannot be traced, since they are well secured through the use of private and public encrypted keys as well as 2FA (Two Factor authorisation).
The IRS views bitcoins as property, not currency. There are tax implications and a federal judge recently ruled that Coinbase must surrender records to the IRS on transactions of $20,000 or more. Even Coinbase, the most established of them all has struggled to keep up with demand, plagued by site outages, scaling issues and customer service complaints. Even if it’s venture-backed, every bitcoin player today is by definition a start-up and comes with all of the associated risks.
Thus, obviously much like other currencies, Bitcoin does have its own advantages and disadvantages, but the choice is up to you. And do note that, the future expectations must be kept in mind before making any decision.