Let’s start with what Bitcoin is, explained in simple terms.
The basic Bitcoin definition would be: “It’s a decentralized, peer-to-peer, and 100% digital money based on the blockchain technology”.
Let’s see what each of these attributes stands for.
Decentralized. It means that Bitcoin does not depend on any central body. No government or bank can issue or control it. Instead, it’s issued utilizing a special mechanism called ‘mining’.
100% digital. This currency has no material representation, except for some collectible coins of gold and silver that no one would accept as payment. This feature makes BTC different from fiat money can be both digital (credit cards) and material (cash).
Peer-to-peer (P2P). To send and receive bitcoins, you don’t need any bank (or a similar centralized system) to manage the process. The money moves directly from one user to another. There’s no ‘trusted third party’: the BTC network ensures this trust using miners.
Blockchain-based. Blockchain or the Distributed Ledger Technology (DLT) is probably the biggest modern invention after the Internet. A blockchain network is a distributed database with all the records stored on many individual computers, and not in one place.
These were the basics to keep in mind. But to understand what Bitcoin is, exactly, we should explore how it applies to real life.
As we mentioned earlier, Bitcoin transactions are P2P. You can send some digital money to another BTC network member directly. It may be a person you know or a complete stranger. The typical question from a beginner is “How I can trust the system and the sender/receiver if there is no central authority to control the process?”
It sounds logical. If you send money through a bank or a payment system like Western Union, this institution performs the procedure for you and charges a fee. A bank keeps all the transaction records and makes sure that your balance is correct. For instance, when you have bought something online for $100, the amount spent becomes unavailable to you even if the retailer hasn’t received the payment yet. How does the Bitcoin network deal with this problem? It seems that, if there’s no central body to control your financial activity, you can send the same bitcoins as many times as you want. Or, you can spend the money you don’t possess, can’t you?
To prevent the problem of ‘double spending’ the network uses a special mechanism. To understand how it functions, we will consider a typical cryptocurrency transaction step by step.
Okay, you promised to send 1 BTC to your friend Alice. What would be your actions?
At this stage, you are probably wondering what mining and Proof-of-Work looks like. No worries, we will deal with these topics later in the article. Before it, we will have a closer look at a Bitcoin history.
What is Bitcoin and where it comes from? Here are some milestones:
There are several important concepts and terms you should be familiar with if you seek to understand Bitcoin. They are private/public keys and BTC address. Here is what these things mean, in a nutshell.
In this part, we will talk about the properties of BTC transactions. It will help you see the difference between the ways digital and fiat currencies work.
Any transaction in the Bitcoin network is:
What is Bitcoin investment is and where can you buy this crypto? There are several ways for you to do it:
Once you’ve bought some bitcoins using any of the methods above, it’s time to decide where you will be storing them.
You can store your Bitcoin using a wallet. There are various types of crypto wallets with their pros and cons. Cons don’t always mean that a wallet is bad, they may naturally result from the structure and purpose of this device/software.
Long story short, we may divide all the wallets into 2 big categories — hot and cold. Hot wallets have a connection to the Internet, and cold wallets are isolated from it. It makes them perfect storages for your bitcoins, especially if you deal with big amounts. Therefore, we will focus on this type below.
Cold wallets fall into 2 categories — hardware and paper wallets. In the first case, it’s a sturdy device that resembles a USB drive (Ledger Nano S) or a keychain gadget (Trezor One). Most of the time they rest in a safe place. When you want to make a transaction, you connect the device to your PC and enter a PIN-code to get them matched. If the code is ok, you send the coins from your hardware wallet and then disconnect it. This storage is 99,99% secure. Your money and sensitive info stay out of reach of hackers even if your computer is infected by Bitcoin-specific malware.
Paper wallets look like pieces of paper (and they are). This is a printout with your private and public keys and QR codes representing them. Unless it gets destroyed, or damaged, or stolen, or eaten by your pet, you can always take it out of a bank vault and recover access to your BTCs. Security experts insist you should have several well-hidden copies — just in case.
It would be a good idea to diversify your digital funds across different wallets. Keep the amount you need daily in a mobile wallet, so you could reach it easily. Store the bulk of your BTC fortune in a hardware wallet like Trezor, Ledger or KeepKey. If you are an active trader, get a wallet provided by a secure exchange.
Also, take all the necessary security measures — we will discuss them after we have done with the mining topic.
Simply explained, mining is the process of adding blocks to the chain. Block is a data unit that stores a certain number of transactions. The number of transactions depends on the block size — the bigger is the block, the more information it contains. You can see a block as a page in a distributed ledger: if you rip it off, the whole story will fall apart. It’s because every new block contains a hash of the previous one, down to the genesis block.
So, who adds new pages to this record book? It’s done by miners. They are network nodes that use special soft- and hardware to solve extremely difficult math puzzles that come with each new block. This process if necessary to validate the transaction and make it an immutable part of the blockchain.
Solving the task requires a lot of computing resources. When a blockchain network is still young and contains few blocks, you can do mining with your PC or smartphone. As the network grows popular and more blocks join the chain, its mining difficulty increases. For instance, if you want to do mining in the BTC network that has been around for 10 years, you need to invest in powerful and rather expensive hardware. It consumes a huge amount of electricity that costs money, too. Besides, you need cooling equipment to avoid overheating and some room for all this machinery.
The question is, why miners spend their time and money to solve these puzzles? They do it to get a reward and a transaction fee. The first miner to solve the puzzle adds the new block and receives some newly-issued Bitcoins. Normally, a lucky winner sells these coins immediately to cover his mining expenses and grab some profit. That’s how new BTCs enter the market.
The Bitcoin network relies on the so-called proof-of-Work (PoW) consensus mechanism. ‘Work’ refers to the calculations miners do to solve the puzzle. When any of them comes up with the right guess, he gets rewarded. It means other competitors have wasted their resources.
To outcompete other miners, you need to buy and regularly upgrade your mining hardware. As we said, these machines are expensive and require a lot of wattages. Thus, the barrier to entry becomes too high for a solo miner. Right now, it makes more sense to enter one of the major mining pools that control the market. In a pool, miners join their resources to do the math. When someone solves the puzzle, the reward is split proportionately between the participants.
Another thing that makes Bitcoin mining less profitable with time is halving. It means the reward per block reduces by half.
It happens every 210,000 blocks or approximately every 4 years. Therefore, the next halving should happen on May 18, 2020. Usually, this event positively affects the BTC price, so many investors look forward to it. Miners are not so excited about the halving, though if the price of the coin grows it may partly compensate for their loss.
Halving is necessary to curb inflation and keep the value of the coin. Unlike traditional currencies, Bitcoin has a limited maximum supply that is 21,000,000 BTC. This number is determined by the coin protocol and cannot be increased.
Halving is an in-built mechanism that helps control the mining activity in the network. It slows down the release of new coins and thus makes them more scarce and wanted. When something good is also rare, it goes up in price.
The major users’ concerns related to Bitcoin are:
We will deal with each issue separately.
Bitcoin and other cryptos lack consistent and clear regulation. Therefore, some people avoid dealing with it as they don’t want any problems with the national tax service.
In general, taxation depends on the country and its laws. Cryptocurrency may have a status of legal tender (means of payment), or commodity, or ‘value represented in digital form’, or ‘financial instrument’. According to their status, different taxes may apply to your crypto transfers and mining profits. So, it would be a good idea to consult a tax advisor before converting your BTC holdings into fiat money or buying a house with them.
Is Bitcoin legal to use and could it lead to some problems with the law? Again, it depends on where you live and do business. Some states have developed a clear legal framework to attract blockchain startups. They are Japan, France, Malta, Estonia. Recently, China decided to follow this path, too.
The countries like Finland, Germany, UK, Switzerland have flexible regulations but are rather crypto-friendly in general.
Finally, there are some places where crypto is illegal. Some examples are Vietnam, Bolivia, Qatar, Afghanistan, Bangladesh, Saudi Arabia, Pakistan.
Many people lack understanding of cryptocurrency and blockchain. They see it as fiat money with benefits — faster and cheaper to transfer and easier to deal with.
What these people don’t understand is that all benefits have their price. Decentralization is a double-edged sword: it gives you independence from central authorities but requires you to be more responsible and better educated on the subject.
If you want your digital funds to be safe, you should:
Keep reading to get familiar with these rules.
There are many ways to lose your digital coins. Below are some mistakes BTC users regularly make.
Though all these things can never happen to you, let’s see what precautions you should take — just in case.
Like everything, Bitcoin has its pros and cons. We have already outlined some of them, but let’s sum it all up, starting with the pros.
Here are the reasons why we love Bitcoin:
Now, meet the cons of the first cryptocurrency.
You have probably heard about Bitcoin Cash and wondered what it stands for. Bitcoin Cash, as well as many other altcoins with the same ‘family name’ is a BTC hard fork.
In short, a hard fork means a split in a blockchain network. It happens when its users radically disagree on the way the blockchain should follow. As a result, two separate chains appear, each having its coin.
Ok, and what is Bitcoin cash vs Bitcoin Core, its father?
Despite all this, Bitcoin remains the biggest and most important cryptocurrency and so far has no rivals in terms of market cap.
We mentioned scalability as the biggest challenge the BTC network is facing today. The oldest blockchain network was not designed for such a workload. In the future, when Bitcoin goes mainstream, the problem will become even more serious.
These days, BTC transactions are rather slow already, compared to many other networks. It urges users to offer bigger processing fees to move their transactions up in the miners’ waiting list. Naturally, it increases the average cost of a Bitcoin transaction processing. Besides, as soon as all the coins are mined up, the network will have to increase transaction fees because miners will stop receiving rewards for solving new blocks.
When it happens, many people, especially in poor countries, won’t be able to afford to use BTC. Luckily, there is a solution called the ‘lightning network’.
Imagine, you have a trusted friend in another country. For some reason, you regularly send and receive to each other small amounts of money. It makes no sense to pay big transaction fees to miners and wait in line.
So, you can facilitate the process by using a special 2-way payment channel. It allows you to make transactions off the blockchain, bypassing the usual procedure and thus avoiding unnecessary costs. A payment channel is a sealed part of the BTC blockchain, protected by multi-signature. It allows 2 peers to conduct microtransactions between themselves without miners’ participation. At a certain point, this channel closes up, and the last set of transactions becomes part of the main blockchain.
The process looks like this:
As you can see, it looks more like a real-life interaction between good friends. You use the advantages of BTC blockchain for keeping tabs but pay much less than if you were using the regular path.
What is bitcoin blockchain?
Bitcoin blockchain refers to the BTC network that allows users make transactions in a peer-to-peer manner. It’s a distributed ledger stored on multiple computers (nodes).
What is Bitcoin currency?
It’s the unit of value that the BTC network users send and receive between them. This currency is purely digital and does not exist in any material form.
What is Bitcoin’s value based on?
The value of Bitcoin is supported by the law of demand and supply. The total supply of BTC is limited. Thus, as more people want to use this coin, the demand for it and its value will grow, and vice versa.
What is a Bitcoin account?
It’s similar to a bank account and serves for managing your BTC funds. You get yourself a wallet (an analog of a banking app) and create an account for dealing with crypto funds.
What is Bitcoin Private?
BTCP is a fork of two popular coins — Bitcoin and Zclassic. The goal of the developers was to create a coin that would be as good as Bitcoin, but also 100% private.
What is Bitcoin’s future?
The future of Bitcoin depends on many things, including regulation. It has the potential for growth, but there are also some challenges. The biggest of them is the network scalability.