What Is Bitcoin? - June 2018
A Complete Guide About the First Digital Currency
Bitcoin is the first decentralized digital currency. This digital currency could be compared to cash or gold that can be transferred on the web as easily as sending an email. There are several descriptions of Bitcoin such as digital cash, electronic currency, virtual currency, or cryptocurrency.
What is revolutionary with Bitcoin technology is that it consists of a peer-to-peer network where no third party controls the currency. In other words, Bitcoin is decentralized. We can briefly describe Bitcoin as follows: Bitcoin is an independent, global and public ledger used to transfer and store value.
- It is independent because no state, bank or institution can control or manipulate the Bitcoin Network. In other words, you can send and receive Bitcoins without having to rely on any third party.
- It is global because everyone can send money fast and cheap, at any time and to anyone in the world. No one can impose restrictions on who can participate and not.
- It is public because everyone can see the transactions in the ledger, at the same time it is anonymous because it is not possible to link transactions to people. Anyone can participate and help secure the network by downloading and storing a copy of the shared ledger.
Where Do Bitcoin Come From?
Bitcoin was created in 2009 by an anonymous developer named Satoshi Nakamoto (probably a pseudonym). Several people have been claimed to be Satoshi, but we don’t know for sure who the individual or group is and will probably never know. The cryptocurrency was created after the financial crisis when it became apparent that the global financial market is unstable.
Bitcoin was designed to be independent and decentralized so that no person or group can control the Bitcoin Network. Satoshi Nakamoto published his white paper on Bitcoin in October 2008. It described an electronic cash system based on peer-to-peer without interference by third parties. (The document is available to read here: bitcoin.org/bitcoin.pdf.)
But how are Bitcoins created? To explain where Bitcoins comes from we should understand where the money on your bank account comes from. If you do not have gold or any physical currency, there must be a register of all transactions. In other words, a ledger to keep track of how much money each person has. The money on your bank account is just a number in a database. When you buy something with your bank card, you need to check against the bank’s ledger if you have enough money to pay with. This is a centralized system where a company has control over the ledger of your money. If we look at history, it becomes clear that we should not trust any third party with our money.
Instead, the Bitcoin Network consists of a large shared ledger of all transactions throughout time. The difference from our current system is that no state, bank or institution can control the ledger. The money in your bank account is not really your money. Instead, the bank owes you that amount.
With Bitcoin, it’s your money that you control yourself as if it were digital gold. You do not need to trust any third party to send and receive money. More about this soon but first we need to understand what money really is to understand Bitcoin.
What Is Money?
What is money, really? Is Bitcoin Money? This is something that has been discussed, and we need to understand what money is and how it works to see why Bitcoins are valuable. Money is simply a medium of exchange for goods and services. It started with people trading goods for goods: I give you two fishes against one chicken. However, it was hard to calculate the value of something when everyone used different means of payment. Eventually, people agreed on a common payment method because it was considered to have value.
In order for something to be valuable, there must be a limited supply. Therefore it worked well with precious metals like gold, silver, and bronze. Being able to pay with gold coins made trading much easier. However, there were some shortcomings. It was impractical to carry around this heavy metal and difficult to divide it into smaller units. Our civilization continued to evolve and we solved these problems with something we call currency.
The bank then stored your gold for you, and with bills, you could prove that you had a certain amount of gold at the bank. You could at any time replace your bills for an equivalent amount of gold in the bank. Today the rules are different. The largest currency dollar left what was called the gold standard in 1933. After that, the currency is completely controlled by the central bank, and there is no limit on how many bills that can be printed. It also means that you don’t get any gold for your bills. A currency that has no underlying value is called a fiat currency. How can a dollar have value when there is no underlying value, and the supply doesn’t have a limit? Good question.
This system also gives central banks the unlimited power to manipulate their currency through inflation for example. Most central banks aim for an inflation rate of 2% each year to reduce the currency value. It may not sound a lot, but it means you’ve lost 50% of your money in 35 years. Where did my money go? Good question.
We answer these questions and explain how Bitcoin solves these problems below.
How Is Bitcoin Different from Normal Currencies?
Fiat currencies only have value because we believe it. A shopkeeper accepts your money because the person believes that the currency will still have value the next day. At the same time, there is a centralized authority that controls the value of this currency. As a consequence, central banks get unlimited power that they use to redistribute money from society to banks that then lend money to companies. The state and the banks believe that this “redistribution” is justified to boost growth and push people to buy more. If this is right or wrong, we’ll let you decide.
Bitcoin, on the other hand, doesn’t work in the same way as it is decentralized instead of centralized. In other words, no authority decides over the digital currency. It is the users participating in the Bitcoin Network that together determines the protocol rules. This results in a system that is fair. We all realize that the current system has shortcomings, as well as the previous means of payments, have had. On the contrary, there are always people who are against change and work to prevent the development of new technology. However, the introduction of cryptocurrencies in our society is inevitable because they solve the problems with current fiat currencies.
Among those who oppose cryptocurrency, one can hear statements that Bitcoin is not a currency. If we look at the definition of a currency, there are 3 distinct features;
- It should act as a means of payment. The fact that Bitcoin serves as a means of payment is proven because you can transfer Bitcoins between digital wallets in just a few minutes around the world. For example, it may take several days or not work at all to transfer money between different countries with regular currencies.
- It should act as a counting unit. Unlike common currencies that only can be divided into cents (0.01) at most, Bitcoin can be divided into what is called satoshi, which is currently one hundredth of a million (0.00000001). The Bitcoin protocol can also be updated in the future for an even smaller breakdown.
- It should preserve the value. As we have said, central banks can manipulate their fiat currency by changing the amount and thus also the value. This doesn’t work with Bitcoin as the supply is limited with a certain amount of Bitcoins (21 million) that will be created until 2140.
But in addition to serving as a currency, Bitcoin can be used for a lot more. The network uses so-called smart contracts which create many opportunities. Transferring money from one to another just happens to be the most common type of contract.
Why Use Bitcoin?
As we have explained, there are a number of problems with the current financial system. Bitcoin solves these problems and is an improvement in all aspects. First of all, you control your Bitcoins yourself. There is no centralized third party that can decide over your money. This is financial freedom with several advantages;
- You can transfer Bitcoins at any time. There are no bank hours or days when it’s closed. You can transfer Bitcoins whenever you want 24 hours a day 7 days a week.
- You do not need to trust any third party. Because Bitcoin is a decentralized currency, there is no need for an intermediary to transfer money.
- You can transfer Bitcoins to anyone. Everyone can create a Bitcoin Wallet in a minute to send and receive Bitcoins to anyone on earth. There are no geographical restrictions or anyone who can deny your transaction.
- Bitcoin is both anonymous and transparent. You have a private key that you use to verify ownership of Bitcoins in the common ledger. It is anonymous because it is not possible to link ownership of Bitcoin to individuals. It’s transparent because the ledger of all transactions is public.
- It is safer than the current financial system. Because Bitcoin uses cryptography and math problems to secure transactions, you can’t trick the system. However, there are ongoing disputes about regular bank transfers that need to be solved using laws where there will always be loopholes.
- Faster transfer. You can transfer Bitcoins in minutes, regardless of location. If you have made a bank transfer between different banks or countries, you know that it may take several days.
- Transaction fees are much lower than usual fees at the same time, it is optional with fees in the Bitcoin network.
If you want to learn more about all advantages with Bitcoin we have this guide.
How Does Bitcoin Work?
As we mentioned earlier, the Bitcoin Network has a large ledger where all Bitcoins are stored. All Bitcoins are linked to a public key, and the owner of these Bitcoins has a private key. With the public key, you generate a new line of code that works as your account number or address. While your private key is the password for accessing your Bitcoins. Your Bitcoin address could look like this:
A Bitcoin Wallet (Bitcoin Wallet) is used to store your private key. This means that your Bitcoins are not actually in your Bitcoin Wallet but are always in the public ledger. Therefore a better description is a keychain instead of a wallet. There are 4 different types of a Bitcoin Wallets;
- Hardware Wallets, it’s not connected to the internet but is offline.
- Online Wallets, you allow someone else to keep your private key for you.
- Software Wallets, it could be an app for your smartphone.
- Physical Wallets, this means that your key is stored on something physical such as paper or metal.
There is no limit to how many Bitcoins you can send per transaction and when the transaction is confirmed, you can not change the public master book. Bitcoin Miners verify all transactions by solving a cryptographic and mathematical problem. The problem is constantly evolving from previous transactions, making the Bitcoin Network very safe.
Every time a miner solves that problems, all transactions accumulate in the last 10 minutes into one block. This block is then connected to the previous block, and in this way, a chain of blocks is created. Therefore, the technology is called Blockchain. In the next section, we go into more detail how the Bitcoin Network works and who controls it.
If you want to learn more about how Bitcoin works, we recommend this guide: How Do Bitcoin Work?
Who Controls the Bitcoin Network?
Bitcoin is based on Blockchain technology where the system uses math and cryptography, not laws and legislation that include mistakes and shortcomings from people. Since cryptography is used, the digital currency Bitcoin is called a cryptocurrency. Bitcoin was the first cryptocurrency, but today there are hundreds of other cryptocurrencies on the market.
The reason why cryptocurrencies did not work before Bitcoin was presented was the problem with double-spending. Bitcoin solved this problem by being based on a decentralized network where everyone can store the common public ledger. This means that you can’t spend your money twice.
In this way, the system requires no maintenance because it is self-regulatory and everyone helps to secure the Bitcoin Network. Because the ledger is stored on multiple computers that use computer power to solve math and cryptography problems, the Bitcoin Network is very safe.
In other words, if you’re going to attack a single block in the network, you need an enormous amount of computing power that requires both resources and high energy costs. At the same time, the math problem becomes harder and harder to solve the more computers that are involved. In this way, no single user can overtake the Bitcoin Network.
No individual person or group that can control the network. To update the Bitcoin protocol, a consensus is required. This makes the Bitcoin Network both decentralized and democratic.
What Are the Disadvantages of Bitcoin?
Bitcoin is a relatively new technology, and the protocol is continuously improving. However, users can have different views if something is a bug or feature. This is why there are several hundred other cryptocurrencies where most are based on the Bitcoin protocol. These are called Altcoins where a group has created its own cryptocurrency with its own rules.
A disadvantage of Bitcoin and cryptocurrencies is that there is no protection. Your Bitcoin Wallet works in the same way as a regular wallet in your pocket. If someone steals your wallet, you will probably never see it again. With Bitcoin, you get more freedom but also more responsibility. At the same time, you have the option to let a company protect your wallet in the same way that a bank is keeping your money today.
At the moment, we can probably agree that the biggest downside is that not all stores accept Bitcoin payments. But the trend is positive with more stores that accept Bitcoins and new Bitcoin ATMs that open every year. (Here is a list of all Bitcoin ATMs: coinatmradar.com.) As more people start using Bitcoin, the market itself will adapt and meet customer requirements. We think it will take a few years before all stores accept Bitcoin. If you have discovered this revolutionary technology already today, you should take the opportunity to learn more about the future of money.
There are also people who think Bitcoin has too high volatility, meaning that the price varies a lot. This happens with all new technology, but then slowly but steadily it decreases. We can already see in recent years that volatility has diminished while the Bitcoin price continues to increase.
That the price can vary a lot can be a disadvantage, but it also creates many opportunities if you want to make money.
Why Does Bitcoin Have Value?
Many things that give Bitcoin its value. First and foremost, there is a limited supply in the same way that gold is rare. This is obviously creating value because it is about simple supply and demand. Moreover, no state, bank or institution that can decide over the network because Bitcoin is decentralized. Bitcoin and Blockchain technology is the next step in the development towards a fairer and more efficient system in society.
If we look at the benefits of Bitcoin compared to current payment methods, it’s easy to understand why Bitcoin is growing so fast. It’s easy to transfer Bitcoins person-to-person, which works in a similar way as torrents. At the same time, there are extremely low fees because there is no middleman or third party. It is anonymous but still transparent because it is open source. Bitcoin transactions can not be linked to persons.
Bitcoin grows fast and has performed better than any other currency for several years. If we look at gold and dollars, both have a market value of several thousands of billions. In that way, the Bitcoin price has a huge upside. But as said, the risk is high, and the price will vary as all other currencies. Past performance is no guarantee of future results.
The main reasons why Bitcoin has value is the following;
- There is no state that can control or manipulate the currency.
- You are protected from inflation because the supply is limited.
- Everyone has the option of being anonymous.
- It is proven that the Bitcoin protocol is safe.
How Can You Get Bitcoin?
You can get Bitcoin in three different ways. The easiest way is to buy Bitcoins from a person or marketplace. When purchasing Bitcoins on the internet, it’s important that the marketplace is safe and reliable. Below we have listed some of the most popular places where it is safe to purchase Bitcoins. If you intend to buy Bitcoins in another place, we recommend that you read about the market before using it. There are also sites like LocalBitcoins where you can meet someone instead of buying online.
The other way to get Bitcoin is by selling a product or service in exchange for Bitcoins. As said, using the Blockchain technology, Bitcoin can not only be used to transfer money. With Bitcoin, you can do a lot of things, and there are great opportunities for those who want to start a business. We are seeing companies emerging in smart contracts, cloud storage, private message services, accounting, online casinos, game companies and much more.
In conclusion, you can earn Bitcoins by so-called Mining. This means that you run software on your computer where you get Bitcoins in exchange for your computer power. It is important to mention that competition in Bitcoin Mining has grown much in recent years. Because the cost of electricity becomes expensive, it’s hard to make money.
An alternative is to become a member of a Bitcoin Mining Pool which is a group of people using their shared computer power for Bitcoin Mining. But even these are having difficulties to compete with large Bitcoin plants that are deployed in selected areas such as China, where electricity prices are lower. At the same time, it can be fun to learn how Bitcoin Mining works.
Again, the easiest way is to buy Bitcoins on a marketplace. Below we list three of the most popular places to buy Bitcoin. These places are both easy and safe to use.
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