A Beginner's Guide To Bitcoin
An Introduction To Bitcoin
In this beginners guide to Bitcoin you're going to learn everything you need to know about one of the hottest assets in the world right now!
Reputable sources have estimated that Bitcoin could hit between $54,000 and $318,000 per bitcoin!
But before you do anything you'll want to know a bit more about Bitcoin right?
So let's get started!
Bitcoin was introduced in 2009 by Satoshi Nakamoto as a peer-to-peer electronic cash system. It is entirely decentralized, meaning that there is no central authority or servers, it offers lower transaction fees than traditional payment mechanisms.
Nakamoto's purpose was to create a currency ecosystem that didn’t involve banks, operating instead using a decentralized ledger known as the blockchain, which is a public ledger of all transactions that have taken place over the network.
Nakamoto left bitcoin in around 2010, leaving it in the hands of a few prominent members of the BTC community.
What Is The History Of Bitcoin?
The domain name Bitcoin.org was registered on 18th August 2008. Later in the year, a white paper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ was published.
The Bitcoin network came into existence on 3rd January 2009, when the first block or the genesis block of bitcoin was mined. The first block that was mined had a reward of 50 BTC. It is widely regarded as the first established cryptocurrency in the world.
How Does Bitcoin Work?
In simple terms, Bitcoin is a digital file that can be stored in a digital wallet, computer, or smartphone. To understand it better, it is vital to get a little context about the following terms:
Blockchain technology is at the core of a majority of the cryptocurrencies that have come after bitcoin. It creates a shared public ledger in which each transaction is a block that is chained to the code. This creates a permanent record of each transaction that takes place.
Private And Public Keys
Bitcoin wallets contain a public and a private key. Together these allow the user to initiate and digitally sign a transaction.
Miners are members of the bitcoin community. They independently verify and confirm transactions using high-speed computers.
A user can only see the number of bitcoins and the results of the transactions done. The bitcoin network shares a public ledger that contains the records of every transaction processed on the network.
The records of the transactions are combined into blocks. The users' wallets can verify each transaction by protected digital signatures that correspond to the sending address.
Due to the verification process, each transaction takes a few minutes to complete. The bitcoin protocol is designed in such a way that each block takes about ten minutes to mine.
The individuals who participate in the bitcoin network are called miners. Miners are the individuals who process the transactions on the blockchain. They are the decentralized authority that enforces the credibility of the network.
Bitcoin is periodically released but at a declining rate as its total supply approaches 21 million. As of July 2020, 3 million bitcoins are yet to be mined.
The process through which bitcoins are released into circulation is called ‘bitcoin mining’. Mining requires the solving of difficult mathematical problems to discover a new block. Each new block is added to the blockchain.
Mining also adds and verifies records of all transactions across the blockchain network. Miners receive bitcoins as a reward for adding blocks to the blockchain. The reward that they receive is halved every 210,000 blocks. The reward was 50 BTC back in 2009. Currently, the reward stands at 6.25 BTC.
In the next chapter of this beginners guide to Bitcoin we will covering the topic of how Bitcoin works in much more detail.
Bitcoin is a collection of computers, all running bitcoin’s code and store its blockchain. All the computers that run the blockchain have the same list of blocks and transactions. Balances of tokens are kept using public keys and private keys.
These are strings of numbers and letters linked through the mathematical encryption algorithm used to create them. The public key is the address that is published; users can send bitcoins to this address. The private key should be kept confidential and is used only to authorize transactions.
What Are The Characteristics Of Bitcoin?
1. Bitcoin Is Decentralized
One of its main objectives was to ensure that the network was independent of any central authority. The network is designed so that an individual, a business, and machines involved in transaction verifications and mining become part of a vast decentralized network. Another advantage of a decentralized network is that if any part of the network goes down, the network is still functional, and transactions can still be conducted.
2. Bitcoin Is Transparent
Every single transaction that takes place on the BTC network is stored on the blockchain. However, it is almost impossible to trace a particular bitcoin address to a specific person. If a person wishes to prioritize anonymity even more, then some wallets give an added layer of opaqueness.
3. Bitcoin Is Anonymous
In a banking system, the banks know every detail about their client, their credit history, addresses, phone numbers, etc. However, bitcoin is very different. Your wallet does not need to be linked to any information that can identify you personally.
4. Bitcoin Is Fast
The bitcoin payment processes all payments instantly. It takes just a few minutes to complete a transfer to someone on the other side of the world compared to a banking transaction that could take several days.
5. Bitcoin Is Non-Repudiable
Bitcoins, once sent to someone, cannot be gotten back unless the recipient decides to send them back. This ensures the receipt of payment.
Where Can You Buy Bitcoin?
There are four ways in which you can buy bitcoins:
1. Cryptocurrency Exchanges
You can buy them through several exchanges in the U.S. and other countries.
2. Bitcoin ATM
You can use the coin ATM radar to find an ATM near you
3. Peer-to-Peer Purchase
You can buy Bitcoins directly from others who own them. These transactions can be done through tools like Bisq and Bitquick.
4. Bitcoin Mining
Bitcoins can also be earned through mining, although the required computing cost and technical expertise put this option out of reach for most people.
How Can You Store Bitcoin?
Once users purchase bitcoin from an exchange, they should immediately be stored in a digital wallet. A digital wallet is a collection of addresses and the keys that can unlock the funds contained in it.
The wallet acts as a bank account, allowing the user to send and receive bitcoins. Users can also use their wallets to buy goods. The user is also solely responsible for the security of the funds stored in the digital wallets.
There are different types of wallets, each with varying levels of security. Users can choose from Mobile, Web, hardware, and paper wallets, depending on which selection works best.
Mobile and web wallets are hot wallets, as in, they are connected to the internet. They are easy to use but don’t provide much protection. Hardware and paper wallets are cold, offline wallets that provide better security but aren’t that easy to use.
Investing In Bitcoin
Bitcoin, as with any other cryptocurrency, is extremely volatile. The price is speculative, and the market is mostly unregulated. Supporters of the currency believe that it facilitates a faster payment system with low transaction fees worldwide.
Governments or central banks do not back bitcoin. However, it can be exchanged for traditional currencies. One of the main reasons for the growth of digital currencies like bitcoin is that they can be an alternative to conventional currencies and commodities like gold.
The simplest and most popular way of buying bitcoin is through various exchanges, although there are many other ways of earning and owning them. You can pay for them in cash, by credit or debit cards, or even other cryptocurrencies. Once you buy your bitcoins, you can store them in your online or offline wallet until you want to make a transaction.
Investors have flocked in the millions to invest in Bitcoin as it becomes more and more legitimised by mass adoption and reputable financial institutions starting to invest in cryptocurrency assets like Bitcoin.
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Risks Of Investing In Bitcoin
Investors were drawn to bitcoin after its rapid appreciation in 2011 and then again in 2013. Many investors who invested in it, did so more for the exchange and investment value than as a medium of exchange. However, investing in bitcoin carries several risks because of the lack of guaranteed value.
Many investor alerts have been issued by regulatory bodies when it comes to investing in bitcoin. Like all other cryptocurrencies, it is in a very nascent stage of development and is still continually evolving, so it is considered a very high-risk investment.
We will talk more about the value of Bitcoin in chapter 3 of this beginners guide to bitcoin.
Security Risks Of Investing In Bitcoin
Many users who own bitcoins have not acquired their tokens through mining. Rather they earn bitcoins from online exchanges. These exchanges are entirely digital and are at risk from malware, hackers, and operational glitches.
If a hacker gains access to a bitcoin owner’s laptop and steals his key, then he could transfer all your BTC to another account. This can be prevented by storing your coins in cold storage or offline wallets like paper or hardware.
Hackers can also hack exchanges and access thousands of digital wallets where all the bitcoins are stored. This is particularly problematic because transactions are irreversible once done.
Insurance Risk And Market Fraud
Government programs do not normally insure bitcoin exchanges and accounts. However, SFOX, a trading platform, announced that it would provide FDIC insurance to bitcoin investors, but it would only be for the portion of the transaction that is done involving cash. Fraudsters can also sell false bitcoins, and there have been cases of price manipulation, which is also quite common.
The value of bitcoin has seen extreme volatility over its existence. The price of bitcoins had fallen by 61% in a single day in 2013 and it could lose value if fewer people accept it as currency.
The competition that has emerged in the cryptocurrency space is also a cause for concern. However, bitcoin is very well established compared to its peers thanks to its instant brand recognition. A breakthrough in the form of a better digital currency, however, is always a threat.
What Are The Pros And Cons Of Bitcoin?
Pros Of Bitcoin:
There are no central governing authorities that control the transactions and impose transaction charges. Some commodities on the internet are also easier to buy with bitcoin than with other currencies.
Bitcoin is entirely digital, which means it can be stored online or in a flash drive. Transactions are almost instantaneous with a single click or a QR-code scan. The money is transferred within minutes without any middlemen or transaction charges involved.
Another advantage that bitcoin gives users is the freedom to choose the transaction fee amount. Users can also choose not to pay the amount at all. Transaction fees on the bitcoin network are voluntary, serving as an incentive to miners to ensure that the transaction is included in the new block. It also works as a source of income for the miners apart from what income mining gets them.
✅ PCI Standards
Bitcoin users don’t need to comply with PCI standards. Since there is no need to comply, users get lower commissions and lower their administrative expenses.
Cons Of Bitcoin:
The legal status of bitcoin varies from one country to the other. Some countries actively encourage the currency, while some countries try to regulate or outlaw it.
Bitcoin is recognized as legal tender in many countries; however, a lot of the countries don’t have any regulations regarding bitcoin, while some have completely banned it.
Bitcoin has seen extreme volatility over the years, having gone through various cycles. BTC’s value can be very unpredictable, and investors should be prepared for significant financial pressure should the prices fluctuate again.
That's all for the first chapter of this beginners guide to bitcoin. In the next chapter of this guide we will be looking at how Bitcoin works Because if you are seriously considering to invest in Bitcoin or trade bitcoin it's important that you know this.