What Is Bitcoin?
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Bitcoin is a decentralized digital currency, cryptocurrency, running on a blockchain technology.
Simply put, Bitcoin is a digital currency that is based on peer-to-peer network architecture. At its core, bitcoin is a list of transactions known as the blockchain that gets its name from how blocks of transactions are verified in a decentralized way. Each block of transactions is “verified” and added to the blockchain but the act of hashing the data and looking for a specific output.
Where did it come from?
More than 10 years ago, Satoshi Nakamoto published a paper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. This white paper marked the onslaught of one of the most revolutionizing technologies of our times, the Bitcoin. It documents the motivation and the technicalities behind the first digital currency based on the blockchain technology.
While we do not know who Satoshi Nakamoto is, 10 years on, his/her/their product is here to stay and challenge all the financial institutions that enforce themselves upon commercial agents (sellers and buyers) as intermediaries.
In the white paper, the mystery person Satoshi Nakamoto provides details about the underlying mechanics of Bitcoin. According to it, the Bitcoin functions on a peer-to-peer network that passes around a chain of blocks where each block represents a transaction that has been made at some point in time.
Each coin is represented as a chain of digital signatures.
In case the owner of a coin wants to spend that coin, they can transfer the coin to the seller by digitally signing a hash of the previous transaction and the public key of the buyer and adding these to the end of the coin. Without any financial institution’s involvement, the owner of the coin, while transient in nature, is established immediately.
What is Blockchain
Blockchain is the technology that Bitcoin uses to carry the operations of its peer-to-peer network. Data in the blockchain is stored similarly to a general ledger, a centuries-old data recording method. But unlike the traditional system, with no security checks and validation measures to confirm the authenticity of the data, blockchain makes sure that the data is valid through cryptographic proofs which makes changing the data difficult.
Data in the blockchain is stored in the form of blocks that are shared in a network. This can be costly because it utilizes a lot of computing power and man-hours of specialized workers called miners who are verifying the transaction. Miners’ job is to solve complicated mathematical puzzles.
Once these miners confirm a new chain of transactions, it will be added to the official blockchain and that change will be recorded separately without altering the original data.
Can two people simultaneously claim the same bitcoin as their own?
The digital infrastructure that facilitates the trade of bitcoin offers remarkable protection against the duplicity of the digital currency. It guarantees that the same coin cannot be used for two different transactions at the same time.
For the buyer to make sure that the seller is not double-spending the coin, all transactions have to be made public. This means that all the nodes on the network where the Bitcoin is functioning must contain records of all the transactions that have been made. Then, a consensus should be formed by a majority of the nodes in the network with regards to the correct history of the transaction. This is implemented by a distributed timestamp server on a peer-to-peer basis.
A proof-of-work algorithm insists that a transaction be verified by linking it to previously established blocks of transactions. This link is extended until the first block (when the coin first appeared) is not reached.
Any adversary wishing to modify this history will need at least a majority of the nodes (51%) to dedicate their CPU power to work on the proof and agree on a history of blocks for that particular transaction. This is one of the limitations of the Bitcoin technology, but it represents a scenario that is as of now very unlikely.
Why do we need bitcoin (and cryptocurrency in general)?
Today, bitcoin has more enemies than friends. Crypto critics bash bitcoin and cryptocurrency every day. Governments and international banks loath their very existence. Really, the question is why we should be bothered by bitcoin and cryptocurrency at all.
The answer is very simple: Our current financial system is fundamentally unstable and flawed.
Bitcoin and digital currency represent everything that this system failed to offer us. It directly challenges the status quo: Banks, governments, financial watchdogs, etc. all are afraid of it.
Problems with the current system
Today, the global village is populated by more than 7.5 billion people. Almost half this number of people live without basic banking services. Even those who do, sometimes wait for hours (or days) before their queries can be answered.
Each time you use your credit card, there is a slight probability that the system which is processing your transaction request might run into some error due to some networking problem.
Moreover, banks charge you heftily for your transaction requests. And, not to blame them, this is how their business model functions.
Finally, the current financial system relies on obscure and unsafe methods for transactions. If someone gains access to your credit card details, which happens so often, then you are toast. In developing countries, we also hear about ATM frauds where adversaries install corporal devices at the ATMs that extract essential data out of users of ATM. This information is later used to extract funds from those users.
These are just a few of the things that are wrong with our current financial system. We can go on and on for hours on length. So, let us just agree that there are some fundamental problems that make our current financial systems weak and fallible and this why you need bitcoin and cryptocurrency.
Why bitcoin and cryptocurrency is better
Bitcoin is decentralized. Its owned and run by the people.
No central authorities control the network upon which bitcoin floats so seamlessly. In fact, the name of the network (peer-to-peer) suggests itself that the infrastructure that facilitates the trade of bitcoin is able to perform because certain nodes cooperate so effectively. As noted above, almost half the population on earth does not have access to banks. With bitcoin, the user only needs access to the internet and voila! They can own their own digital wallet and start trading in bitcoin.
There are only small transaction fees associated with bitcoin, and that goes to those that maintain the blockchain. With the old system, if you were to send $100 to someone, the banks would deduct almost $3-5 from your account. With bitcoin, you can achieve the same task instantaneously without incurring many costs (you still need to pay a few cents).
Security and Privacy
Lastly, in terms of security and privacy, there is no match between bitcoin and the old system. The underlying backend that runs the bitcoin network uses cryptography and hashing to protect the meta-data. It guarantees that a certain coin belongs to a certain entity without creating any room for doubt. Unlike banks, the bitcoin network is oblivious to your personal information. You are ever anonymous.
So, as mentioned before, bitcoin challenges the status quo because it is decentralized and maintains your anonymity. It is faster, more secure and less expensive to maintain. Now you understand why the banks and the government fuss so much about bitcoin’s global deployment. Such a scenario would render central authorities (banks etc.) penniless.
How to buy Bitcoin?
Thank to the skyrocketing prices of bitcoin, everyone is interested in buying some. But despite the overwhelming attention that this digital currency has been given, enthusiasts still seem to be clueless about how to purchase bitcoin.
You can get your bitcoin from dedicated bitcoin exchanges or from other people directly through marketplaces. However, the process is more complicated than that. In this subsection, we brief you through a walkthrough on buying bitcoin.
But before we dive into that, it is important to emphasize the volatile and unsteady nature of bitcoin. To give you some context, the price of bitcoin on 15 December 2017 was $19650. The same bitcoin was being sold for $3183 on 15 December 2018.
The value of bitcoin is derived from how much trust people are willing to put into it. The mechanics of price, like always, are determined by supply and demand of the currency. When people rushed to exchanges to buy bitcoin during its ascending phase, experts knew then and there that a downfall in pricing will follow immediately. This is exactly what happened!
Be warned about this trade! Invest as much as you are willing to take out as loss.
Now that we are done with precautions, let us understand what it takes to own bitcoin.
Setting up a digital wallet.
The first step is to sign up for a digital wallet. Whether you buy your bitcoin from an exchange or from another person in the market directly, you will require a digital wallet that can store your bitcoin. You can register for one of these wallets either on some crypto exchange platform or through independent digital wallet providers. A brief online lookup can direct you towards dozens of such providers.
Additionally, you can also maintain a hardware digital wallet. A hardware wallet is a physical electronic device, built for the sole purpose of securing crypto coins. Ledger Nano and TREZOR T provide some of the best hardware wallets out there.
There are certain advantages of keeping hardware digital wallets. They are easier to maintain and secure your bitcoins and other currencies. They provide more safety with routine backups. Setting up one of these wallets isn’t much of a hassle even if you are a beginner in this trade.
However, these are more expensive and require physical space. For some first-time users, understanding the manual can be frightening so you may require some guidance as well.
Once you have a digital wallet ready, you need to decide what method of buying you want to go for.
Buying Bitcoin through a Cryptocurrency Exchange
There are numerous crypto exchanges out there. We have reviewed some of them here. In the past couple of years, the rise in the popularity of bitcoin has given birth to numerous bitcoin exchanges. These exchanges purchase and sell bitcoin on your half. As middle-persons, they keep some amount as their commission and service charges.
Spend a couple of minutes online to look for the best bitcoin exchanges. Sifting through reviews can give you a better idea of where these agencies stand. Some of the popular bitcoin exchanges include:
- Huobi SIN
- Bittrex USA
- Bithumb KOR
- OKEx MLT
- Bitfinex HK
- Coinbase USA
- Bitstamp GBR
- Kraken USA
Some of these exchanges may not provide services in your region. You can check that by visiting their website.
Exchanges also close down and open up very quickly at the moment so these may not all still be available.
Once you have chosen an exchange of your liking, create an account on their portal and configure your digital wallet with it. You can purchase bitcoin either by credit card payment or bank transfers.
Your exchange is your intermediary that facilitates your bitcoin transactions. They provide sufficient detail on how to navigate through different services on the exchange platform. So even for starters, this method of buying bitcoin is convenient. Regardless, if you are dissatisfied with the first impression, you might want to consider switching the exchange.
Buying Bitcoin Directly
Certain websites online can locate sellers and buyers of bitcoin near your locality. You can reach out to such people and negotiate a deal with them. Each seller/buyer has their own bitcoin rate fixed. You can select the one which offers minimal rates (in case you are buying).
The obvious advantage of dealing bitcoins locally is that it removes the middle-man from the picture. In the absence of the agency, you can save the service charges that these platforms levy on the customers.
You can also visit a bank branch near you that facilitates the trade of bitcoin. Online lookup can direct you to such branches where you can deposit hard cash and in return receive bitcoins.
Additionally, you can also use bitcoin ATMs to perform a similar function. Services like Coinatmradar can direct you to the closest ATM machine where you can hand in the cash, scan a QR code representing your wallet address using the BTM scanner. Bitcoins are directly transferred to your wallet.
Selling your bitcoin is similar to how you bought them in the first place. Almost crypto exchanges facilitate the selling of the digital coin. They act as the intermediary and sell your bitcoin on your behalf.
Secondly, using the same services that can directly link you to sellers of digital currency, you can search up for people interested in buying the coin. Register yourself to one of these portals and fix your rate at which you wish to trade your bitcoin. This rate is important because a balanced rate will help buyers reach to you faster. So, do not be greedy and set high rates. It does not work that way.
ATM machines can take in bitcoins from your digital wallet and hand out cash. To sell the bitcoin, type in the amount of bitcoin you wish to sell and send it to the address displayed on the machine screen. After the query is successfully processed, hard cash is handed out to you. But keep in mind that the selling price of Bitcoin at these ATMs is almost 5-10% less than the official exchange rates.
It is important to understand the what’s and how’s of Bitcoin and cryptocurrency in general. The whitepaper for Bitcoin by Satoshi Nakamoto was released in 2008. The first block representing a transaction (the genesis block) was mined in January 2009. Ever since then, the Bitcoin has been on a course of remarkable growth. Today, it seems ever closer to fully integrating with our current financial systems.
Today, with Bitcoin, you can buy gifts, pay your parking tickets, buy airline tickets, perform cross-border payments and much more. It has become a promising alternative to debit/credit cart facilitated trade. Any person with a sound understanding of cryptocurrency will tell you that there is a high chance that Bitcoin will become the modus operandi of our future commercial activities primarily because it offers unparalleled security and speed of processing with minimal occurrences of the error.
With Bitcoin, gone are the days when buyers could cheat on the sellers by canceling the payments once the product had been dispatched. Blockchain algorithm can process and log a transaction in about 10 minutes. The unalterable database model will mean that transactions can no longer be reverted by the adversaries who plan to cheat the system.
Finally, Bitcoin will rid the world of banks. It has become synonymous with decentralization and anonymity. Bitcoin network protects your identity, guarantees your transactions, does not charge you much for transactions (no matter how big) and removes the hassle of going to the bank every time you wish to deposit or withdraw money. It most certainly in the future.