- Marco Fisher
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- Published: October 30, 2018
- Modified: February 19, 2021
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What is Bitcoin? A question anyone with an eye on the stock market and investing in general has surely heard by now. You yourself might have heard wild stories about ordinary people becoming millionaires overnight just by investing in this exciting and mysterious new form of currency.
You might be very eager to jump on the bandwagon head-first without fully understanding the answers to some focal questions. What is Bitcoin exactly? What is its long-term value? Where does it come from, how can someone start acquiring, earning and ultimately profiting from Bitcoin?
In our ultimate Bitcoin guide, we’re going to discuss what Bitcoin is, where it comes from, what advantages it offers you as a consumer, and what most people don’t know about the Bitcoin “mining” process.
The Basics of Bitcoin
Why You Should Use Bitcoin
How to Make Money with Bitcoin
Who Accepts Bitcoin Now?
CHAPTER 1
The Basics of Bitcoin
The easiest way to describe Bitcoin is that it’s a “decentralized digital currency”. That means that whereas most currency is traded by a bank, finance company or clearinghouse, digital “Bitcoins” are transferred directly from person to person with no middleman company.
You use the Internet to transfer this virtual currency, which means you can expect several advantages over traditional money. While a bank or credit card company has rules, Bitcoin has almost complete freedom. There is no central authority that approves or denies transactions. The consumer/customer really is king here.
There are also numerous companies online that prefer to pay Bitcoin fractions because of the easy transferring system. We’ve made a handy guide about income methods that might involve Bitcoin or other digital currency.
Bitcoin is a form of cryptocurrency which requires an address that is accessible by an app/website interface called a Bitcoin Wallet. The reason why your Bitcoins have guaranteed privacy with these online wallets is that wallets are not storage sites like Google or Dropbox or a typical bank website either. The structure is not connected to any companies, services or entities.
Bitcoin’s mythical origins
Bitcoin was created in 2009 as “open-source software”, meaning no one specifically owned it and the program could be altered or improved. The person’s name credited for creating Bitcoin was apparently male, Satoshi Nakamoto, though there’s not a lot of evidence confirming his existence.
But his/her identity doesn’t matter, as it has zero relevance to the validity, popularity and potential of Bitcoin.
Whoever it was who created the concept of cryptocurrency and also started the implementation of the Bitcoin system, set a revolutionary course for mankind: Bitcoin and cryptocurrency disregard the established financial institutions and radically alter people’s perception of what a currency is, can be or can do.
The original programmer also created a Bitcoin forum and registered a domain name for Bitcoin.org. Until 2010, he/she was regularly involved in public discussions on the forum but eventually handed over all control (including the source code for the entire system) to the community.
Whoever Nakamoto really was is anyone’s guess, but it’s likely he/she has billions now.
Nakamoto’s goal (some might call it ‘vision’) was to create a form of currency that had no central authority and no constricting rules, unlike fiat money, like the U.S. dollar or U.K. pound, which only have value because they are backed by their respective governments.
Gold and silver have intrinsic value but fiat currency, usually paper money, typically does not.
Bitcoin’s lack of centralization allows for free and easy exchange between any two users with a value that stays consistently high, if not always steady.
The only “rule” is that all transactions are made over the Internet and are publicly accessible. However, aside from the recorded transaction itself, not much information is available about the various users trading these Bitcoins.
CHAPTER 2
Why You Should Use Bitcoin
1. Freedom from the mainstream financial system
This means no more answering to centralized banks or credit card companies. No more limits or waiting times because of old and inconvenient policies.
2. Money that goes beyond borders
3. Anonymity of purchases
Privacy and security are enhanced with Bitcoin because of its anonymous nature. There is also a much lower chance of identity theft given the nature of using cryptocurrency.
4. Lower transaction fees
5. No human error or currency manipulation
Bitcoin’s mathematically based system prevents human errors as well as currency manipulation by governments or banks.
Knowing the advantages, however, isn’t the same thing as understanding the somewhat technical process behind mining. Let’s next consider how Bitcoins are made and why it’s a “perfect system” that can’t malfunction.
CHAPTER 3
How Does Bitcoin Work?
Bitcoins aren’t printed like regular money and are not authorized – rather, they are generated automatically and strictly according to algorithmical rules. These “rules” were started by the original Bitcoin programming and are set to generate automatically over time.
Since the ledger is always public and available, all Bitcoins are accounted for and so each coin or coin fraction can be assigned a value in ‘common’ currency. The original programmer assigned a total of 21 million Bitcoins to be generated. No more, no less.
The programming also set 50 Bitcoins as a starting reward for mining a complete “block”. However, over time and by design, that number dropped to 25, then to 12.5 and will drop again to 6.25 in the year 2020. Every four years the number of Bitcoins earned per block is divided in half.
What is Bitcoin‘s expected end? The final coin will be mined…in the year 2140. At the present time, there are 17 million Bitcoins in circulation. But the price of Bitcoin can fluctuate — lately, between $3,000 and $6,000. But it has been over triple that amount.
When users transfer Bitcoins, they are using a peer-to-peer network: a direct server-to-server connection without a central provider.
New Bitcoin transactions are recorded in a huge virtual ledger book called a “blockchain”. This archive dates back to the original Bitcoins first mined and has recorded every transaction made ever since then. This is the system that keeps Bitcoin organized and honest and therefore exchangeable with fiat currency.
What is the Blockchain?
There is a unique secret code attached to all your transactions. This electronic signature appears within minutes of a transaction. Note that it’s only attached to the transaction process, not to you specifically. Your security is safeguarded, and you’re all anonymous. Once it appears, it’s verified by miners and stored permanently in the network, or as we know it, the blockchain.
These “blocks” are files that contain network data and transaction history. Think of a block the same way you think of a page in a large book. Each new block is a series of files and there are numerous blocks that have already been recorded and that generated Bitcoins.
CHAPTER 4
How to Buy Bitcoin
What is Bitcoin’s process for buying? In order to buy Bitcoins, or fractions of Bitcoins, you must first set up a Wallet app or website portal and then fill out a form with basic details about the transaction.
You must use a traditional payment method to buy Bitcoin, whether that’s a credit/debit card or bank transfer. Once you purchase your Bitcoins you will see your Bitcoin balance in your wallet. After that, the traditional payment entities have no jurisdiction over what you do with those Bitcoins.
An alternate method of purchasing would be contacting a Bitcoin exchange, which is merely a place to trade Bitcoin for currency, or currency for Bitcoin, which may be helpful if you’re traveling to other countries. Unlike your Wallet, which lasts indefinitely, Bitcoin exchanges are not for storing Bitcoins for an extended period of time.
How to Keep Your Bitcoins Secure
You must use a traditional payment method to buy Bitcoin, whether that’s a credit/debit card or bank transfer. Once you purchase your Bitcoins you will see your Bitcoin balance in your wallet. After that, the traditional payment entities have no jurisdiction over what you do with those Bitcoins.
An alternate method of purchasing would be contacting a Bitcoin exchange, which is merely a place to trade Bitcoin for currency, or currency for Bitcoin, which may be helpful if you’re traveling to other countries. Unlike your Wallet, which lasts indefinitely, Bitcoin exchanges are not for storing Bitcoins for an extended period of time.
Bitcoin Wallets
Bitcoins allow privacy and protection via a Private Key and Public Key. The Private Key is a secret number that is auto-signed in all transactions involving you. The Public Key is what confirms you own a unique address and this allows you to receive Bitcoins or fractions of a Bitcoin. Your address is actually an abbreviated Public Key, and is used as a simulated account number to receive funds.
Bitcoin Wallets store both your private and public keys.
Public keys are accessible by anyone (so you can publicly ask for donations) but half of the address is private and stays in your Wallet files. Even though someone could spy on your public balance, without the private key information they cannot access those funds.
The private key of your address is such a valuable commodity, (particularly for people who store hundreds of Bitcoins) that traders will go to great lengths to hide this secret information.
Encrypting the information is one idea, and what most services offer. The most competitive sites offer what is called “multi-signature” facility, which is a stricter form of verification. Fraudulent transactions (as in transactions that exceed Bitcoin balances) are quickly rejected by the network and will not be recorded.
The alternative option is to store the private key offline, either as an app that is not connected to the Internet or as a USB drive. This is called ‘cold storage’.
Cold storage
While cold storage could mean literally protecting a number on your person or in your home many wallet providers now provide similar options as well, such as keeping the private key offline, not on their web server, and not constantly accessible by any computer.
The advantage to choosing third-party companies for cold storage is that they follow a protocol for keeping keys safe, whereas individuals tend to lose the information or damage the object that holds the key. Physical offline devices like computers, USB drives, CDs and DVDs can be compromised or destroyed. That’s why commercial cold storage is growing for long-term investors.
CHAPTER 5
What is Bitcoin Mining?
If you want to earn Bitcoins rather than buying them outright, you can start Bitcoin mining. This is the process of confirming recent transactions in a new “block” in a trustful manner.
The process confirms that new transactions are valid, bundles said transactions, and then selects the “header” of the most recent block to insert it into the new block as a hash. The next step is to solve the proof of work problem and then put the new block into the local blockchain, which is then permanently added to the network.
Sounds complicated, right? Let’s clear that up for you…
So what is Bitcoin mining in simpler words? It’s actually an automated computer process. requiring high computational power to handle all of these transactions. So you’re not actually doing the problem solving yourself – you are hosting the computers that perform the calculations and processes for you through advanced hardware and software.
However, the difficulty level of these complex computational math problems is very high and it gets progressively higher the more miners that try to solve it.
Many miners join a Bitcoin team, simply because there’s so much competition involved. On top of that, normal PCs can’t handle the processing power or speed required to compete. You’d have to invest in a supercomputer exclusively made for cryptocurrency mining in order to stand a chance.
What your super powerful computer does is constantly throw out hash guesses (a 64-digit hexadecimal number) at a fast and powerful rate, until a solution is found. The problem is, the odds of a single miner guessing the hash is 1 in seven trillion!
If you’re serious about trying to mine Bitcoins, make sure you take all these factors into account. However, if you persevere and succeed, the potential for great financial gain is most certainly there!
An Example of a Bitcoin Transaction
Let’s say that you want to buy a product from an online store that accepts Bitcoin. When you transfer Bitcoin, you’ll send the currency to a so called “Bitcoin address”. The online store that you are buying the product from, will provide you with this address or QR-code.
The first step is opening your Wallet App and making a transfer.
You take the address/code provided to you by the online store/business and plug it into the wallet app.
You then have to authorize the order
Next, select the amount of Bitcoins or Bitcoin fractions you want to spend
Finally, click finish/done.
There, your first Bitcoin transaction is already done! The data was sent to Bitcoin miners that make up the blockchain and they verify each transaction, finalizing it in the ledger book. Simple process for you…fairly easy process for the miners, but a lot of work for the computers!
CHAPTER 6
How to Make Money with Bitcoin
What is Bitcoin in terms of starting a career or as a way to earn money online? There are actually a variety of ways of making money online with Bitcoin including:
1. Mining
Mining for coins requires joining a team of miners or working independently with capable servers.
2. Trading and Investing
Trading and investing Bitcoins, which includes studying the market and knowing when to buy and sell can generate a great amount of profit.
3. Related Products/Services
Creating Wallet apps or other useful Bitcoin features and services, such as offline storage sites, can be very lucrative.
4. Blogging
Generating interest in Bitcoin and writing articles about the industry can earn money from clients. Some clients will pay freelance writers in Bitcoin currency.
5. Other
Bitcoin ads, also called faucets or microtasks, are when users interact with Bitcoin-related ads in a number of ways; and are in return paid in Bitcoin.
Remember that Bitcoin is not the only form of cryptocurrency or digital currency. Many imitators and spin-offs have emerged in recent years and there are literally thousands of competitors. Some of the other altcoins to consider as a second option (or to diversify your investments) might include Litecoin, Ripple, Ethereum, and Bitcoin Cash.
CHAPTER 7
Who Accepts Bitcoin Now?
What is Bitcoin’s value if no one accepts it? Nothing – value is always partly determined by demand, especially with a currency that lacks physical commodity.
The good news though is that many countries and companies are already accepting Bitcoin, with more hopping on the bandwagon every year.
Bitcoin can be converted into any fiat currency, at least until a country attempts to ban all Bitcoin wallets and Bitcoin possession. Once a country bans Bitcoin, such as Vietnam or Bolivia, it’s harder to trade Bitcoins and keeping them becomes a risk. Some countries like China and Saudi Arabia put restrictions on Bitcoin trading, such as allowing private storage and trading but not allowing currency exchange.
The Future of Bitcoin and Cryptocurrency
What is Bitcoin’s future? Many people are concerned about Bitcoin’s future, given its clashes with government authorities, CEOs and other investors who speak negatively of its reputation. Where does this criticism come from?
Primarily that it’s an altcoin produced outside the system and with suspicious/mysterious origins. Bill Gates famously said he would bet against Bitcoin, because of its lack of physical commodity. Nevertheless, an article from Harvard Business School suggested that the future will be determined by the blockchain, not necessarily the virtual coinage.
Fans of altcoins say that digital currency will always be around because of the decentralization and lack of monitoring by an authority. Since law enforcement can investigate Internet crimes based on other factors, the anonymity of Bitcoin is not a major issue, except perhaps in tax evasion. Most countries still require reporting Bitcoin income.
But regardless of all that , Bitcoin has so many advantages. Free international trading, which imagines an economy without borders and not under the control of central banks or governments is frightening to the elite.To say that Bitcoin intimidates politicians and the ultra-wealthy would be an understatement proportional to the potential for growth in the cryptocurrency market.
What is Bitcoin? Bitcoin started off as a mere experiment, but has grown into a global, revolutionary phenomenon with the potential to threaten the currently established financial institutions. It’s convenient, secure and getting more popular by the day. Despite what pessimists say about its future, Bitcoin has solidified its place in history and chances are that your grandchildren will be using it as a common form of currency.
