Introduction to Bitcoin 

Nov 09, 2020 04:44PM 9 min read

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 with this introduction to Bitcoin! 

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When Did Bitcoin Start? 

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 Introduce 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.

 

Key Takeaways

  • Launched on 3rd January 2009, bitcoin is the world's largest cryptocurrency by market capitalization.
  • Bitcoin is a digital currency that can be stored in a digital wallet, computer, or smartphone.
  • There are no central governing authorities that control the transactions and impose transaction charges.
  • Bitcoin, as with any other cryptocurrency, is extremely volatile. The price is speculative, and the market is mostly unregulated.
 



What Is The History Of Bitcoin?

This history of Bitcoin is one of the key things to understand if you want a full introduction to this Cryptocurrency. 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, these terms will help you have a full understanding of Bitcoin and are a phrases you will hear often when reading about an introduction to Bitcoin: 

 

Bitcoin Uses Blockchain Technology

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.

 

Bitcoin Is Transferred Using 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.

 

Bitcoins Are Mined By Miners

To be able to undertsand Bitcoin and have a good introduction to how Bitcoin works you should know about Mining however if you're looking to invest in Bitcoin you may not be too bothered about how they came into existence, if that's the case you can skip this part. 

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 so if you're still feeling a little unsure, make sure you read on. 

 

Understanding Bitcoin

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

If you've been reading up on Bitcoin in order to get a full introduction you've probably heard the word "Dencentralized" being mentioned a lot. One of Bitcoins 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?

Most good introductions to Bitcoin will tell you where and how you can buy Bitcoin so it's imprtant that we give you this information. 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.

 

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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.

If we didn't talk about crypto wallets in this introduction to Bitcoin then we would be missing a key point that you really should understand, lucky for you we have and hopefully you'll be storing the Bitcoin that you buy in the most secure way. 

 

 Is Bitcoin Too Volatile?

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. 

Don't worry, in chapter 4 of this beginners guide to bitcoin you will find all the information you need about how to buy bitcoin.

If you want to start buying bitcoin now you can do so with reputable online platforms such as eToro - You can open an eToro account by clicking here, from eToro you will be able to buy Bitcoin and other popular Cryptocurrencies.  

What Are The Risks Of Investing In Bitcoin?

Our aim in this introduction to Bitcoin is to make sure you understand both the upside and the downsides of investing in Bitcoin so it's imprtant to understand what the risks are.

Much like any other investment there is a risk of losing money. to give you a bit of background on 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 potential investment value rather 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 but as time goes on there are more and more arguments emerging for it to be considered a good potential investment. 

We will talk more about the value of Bitcoin in chapter 3 of this beginners guide to bitcoin. 

 

What Are The 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.

This is probably the main reason why people use wallets that are offline and opt not to store their Bitcoin in the wallet provided by the exchange. 


Do You Have Any Insurance When Investing In Bitcoin?

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.

 

What Is The Risk Of Bitcoin Being Replaced By Another Cryptocurrency?

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, although it's worth noting that was a long time ago and the price has since rallied a significant amount. Nowadays we don't tend to see such huge movements. 

The competition that has emerged in the cryptocurrency space could be seen as 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 competition, is always a threat.


What Are The Pros And Cons Of Bitcoin?

 

Pros Of Bitcoin:

 

✅ Freedom

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.

 

✅ Portability

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.

 

✅ Commission

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:

 

❌ Legal 

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.

 

❌ Recognition

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. 

 

❌ Volatility  

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.

 

We will talk more about the pros and cons of using Bitcoin as a payment method later in this guide and we will also talk about the pros and cons of investing in Bitcoin

 

That's all for the introduction to bitcoin and 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. 

Next: How Does Bitcoin Work?

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