What is Bitcoin: The Ultimate Crypto Guide

Bitcoin is the first and most popular cryptocurrency that came to mainstream recognition after its price broke 20.000 dollars in 2017, 8 years after its inception. It is a revolutionary yet simple concept disrupting the existing financial system: Bitcoin is digital money that enables secure peer-to-peer transactions on the Internet. In this guide, you’ll find out everything you need to know about the most popular cryptocurrency.

Introduction

Bitcoin is the first successful decentralized cryptocurrency, launched in 2009 by a mysterious creator under the pseudonym Satoshi Nakamoto. Often denoted by its ticker symbol BTC, Bitcoin was born out of the 2008 financial crisis. It was a response to the perceived failures of the traditional banking system and an attempt to create a decentralized form of money that any government or institution does not control. The word “cryptocurrency” refers to a group of digital assets where transactions are secured and verified using cryptography – the scientific practice of encoding and decoding data. Hence the name – blockchain technology.

Fun fact: The first real-world Bitcoin transaction was for two pizzas in 2010. A programmer named Laszlo Hanyecz paid 10.000 Bitcoins for two pizzas. This day is now celebrated as “Bitcoin Pizza Day”.

What is Bitcoin?

Bitcoin (BTC) is, therefore, a digital peer-to-peer currency. Think of it as digital tokens you cannot physically touch or hold, and all Bitcoin transactions are recorded in a public, decentralized, and immutable ledger. Bitcoin has revolutionized the payment system for many, as its initial idea was seen as a new (and decentralized) way to pay for goods and services that did not rely on a centralized bank, government, or credit provider. Today, there are many debates about whether Bitcoin really works as everyday money or more as a store of value – and the scales are increasingly tipping towards the latter, which is why we hear the phrase digital gold in connection with BTC.

Bitcoin Key Features:

• Decentralization: Unlike payment services such as PayPal, which relies on the traditional financial system and existing debit/credit accounts to authorize money transfers, Bitcoin is decentralized. In practice, this means that two people, anywhere in the world, can send Bitcoin to each other without the intervention of a bank, government, or other institution.

• Transparent transactions: Every Bitcoin transaction is tracked on a blockchain, which is similar to a bank ledger or customer asset register. Simply put, it records every transaction ever made using bitcoins. Unlike a bank ledger, Bitcoin’s blockchain is distributed throughout the network. This allows for transparency of transactions, as the record or block in the ledger cannot be changed. In this respect, Bitcoin has also solved the problem of double spending, which many previous digital currencies have tried to solve.

• Limited supply: The maximum supply of Bitcoins in circulation is set at 21 million coins. This scarcity is coded into the Bitcoin protocol and can’t be changed. It is designed to make Bitcoin a deflationary currency.

• Global: Bitcoins can be easily transferred around the world for lower fees and faster than conventional money transfers.

• Bitcoin mining: New bitcoins are created through a process called mining. Miners use powerful computers to solve complex mathematical problems. The first one to solve the problem adds a new block to the blockchain and is rewarded with a certain number of new bitcoins.

• Fragmentation: You don’t have to buy the whole bitcoin. You can buy a fraction of a bitcoin if that’s all you want or need. Each Bitcoin can be divided into 100 million smaller units, called »satoshis«. This high divisibility makes Bitcoin suitable for micro-transactions, which are not always possible with traditional currencies.

Who Created Bitcoin?

There has been a lot of speculation and misrepresentation about Satoshi, but the identity remains a mystery – and that goes well with the whole crypto ethos. The enigma surrounding Nakamoto isn’t just about identity, it’s about purpose. By remaining anonymous, Nakamoto ensured that Bitcoin remained truly decentralized, free from the influence of its creator. This anonymity also protected Nakamoto from potential legal repercussions and threats from traditional financial institutions threatened by Bitcoin’s rise.

In January 2009, the software to create the cryptocurrency was released, and shortly afterward, the first block, known as the Genesis block, was “minted” on the network. For a while, Satoshi Nakamoto and a few others mined Bitcoin on the network before mysteriously disappearing and handing over control to a programmer named Gavin Andresen.

How Does Bitcoin Work?

The decentralized aspect of Bitcoin is what truly sets it apart from the others. There are no regulating authorities or middlemen in charge of or monitoring Bitcoin. It is dispersed throughout a peer-to-peer computer network, while Bitcoin transactions between users are private and anonymous. Some praise the anonymity of Bitcoin transactions. Others, including governments, are concerned about the potential of crime because it is impossible to follow down individual identities.

Despite being referred to as digital money, Bitcoin is not a traditional asset. Thus, the term may be a little unclear at first glance. Bitcoin is not even a digital item or file on your computer. Bitcoin is essentially a transaction history that proves you received valuable goods from someone. For that process, Bitcoin employs a proof-of-work (PoW) mechanism, which we will describe later.

To have a basic understanding of Bitcoin, we need to get familiar with the following concepts:

1. Blockchain: Bitcoin is powered by an open-source code known as the blockchain, which creates a shared public history of transactions grouped into blocks chained together.

2. Public and private keys: A Bitcoin wallet contains a public and a private key, allowing the owner to initiate and digitally sign transactions.

3. Bitcoin mining: This is the process of creating bitcoins. Miners use powerful computers to solve complex mathematical problems. We will describe the process in more detail below.

4. Bitcoin Nodes: These are computers that validate and relay transactions on the Bitcoin network. They work together to ensure all transactions are valid and prevent double-spending.

5. Digital Wallets: To store and manage bitcoins, users need a digital wallet – a software program that stores private and public keys, allowing users to send and receive bitcoins and monitor their balance.

How is Bitcoin Created?

Bitcoin miners are rewarded for their efforts with a small amount of new bitcoins, and the reward for mining is halved every 4 years to slow down the creation of new bitcoins. This event is called Bitcoin halving.

As mentioned above, the Bitcoin network is programmed only to be able to mine 21 million bitcoins – so at the current rate, all tokens will be mined sometime in the year 2140. Halving, therefore, happens every 210,000 blocks, or about every 4 years.

When the Bitcoin protocol was launched in 2009, each successful miner received 50 bitcoins (BTC) as a block reward. This was followed by:

• 2012 halving: 25 BTC reward
• 2016 halving: 12,5 BTC reward
• 2020 halving: 6,25 BTC reward
• 2024 halving: 3,125 BTC reward, etc.

Fun fact: Bitcoin’s proof-of-work algorithm for mining requires a significant amount of electricity. According to the University of Cambridge, Bitcoin has emitted an estimated 200 million tonnes of carbon dioxide since its launch.

How to Become a Bitcoin Miner?

At the beginning of Bitcoin’s journey, it could be competitively mined with a PC, but those days are long gone. As it has grown in popularity, more miners have joined the network, reducing the chances that you will be the one to solve the hash. You can still use a PC as a miner if it has newer hardware, but the chances of solving the hash yourself are negligible.

You are competing against a network of miners who generate approximately 220 quintillion passwords per second. Machines called ASICs were explicitly built for mining – they can generate about 255 trillion passwords per second. By contrast, a computer with the latest hardware generates about 100 megahashes per second (100 million).

Bitcoin uses a proof-of-work mechanism

Computers on the Bitcoin network use a process called proof-of-work (PoW) to validate transactions and protect the network. Although it was the first and generally the most common consensus mechanism for cryptocurrencies, others have evolved—most notably proof-of-stake (PoS), which typically uses less overall computing power and thus less energy. One example of a cryptocurrency that uses the PoS mechanism is Ethereum (ETH).

Proof-of-work elevates certain network participants to the role of validators – better known as miners – only after they have demonstrated their commitment to the network by devoting a massive amount of computing power to discovering new blocks – a process that typically takes about 10 minutes. When a new block is discovered by a successful miner who found it during the mining process, the miner fills it with 1 megabyte of confirmed transactions. This new block is then added to the chain, and a copy of the ledger for all users is updated to reflect the latest data. In return for his efforts, the miner can keep all the fees related to the transactions he has added, and he also receives the amount of newly mined bitcoins. The new Bitcoin created and handed over to successful miners is known as the block reward.

Environmental Impact of Bitcoin Mining

Renewable energy sources are becoming increasingly popular in mining operations, and research into more energy-efficient consensus mechanisms is ongoing. Despite the criticisms, PoW has proven to be a robust and secure mechanism for Bitcoin. It has successfully thwarted double-spending attacks and maintained the integrity of the blockchain for over a decade.

How Much Does It Cost To Use Bitcoin?

Every Bitcoin transaction comes with a cost. This fee compensates miners for validating and recording transactions on the blockchain. As the Bitcoin network grows in popularity, so does the competition to include transactions in the next block. This competition can lead to higher transaction fees, especially during peak times. And why does this matter? Well, these fees can sometimes exceed the transaction amount itself for small transactions! Imagine buying a coffee with Bitcoin and paying more in fees than for the actual brew. Not so appetizing, right?

Lightning Network

The crypto community introduced the Lightning Network to address the scalability and cost issues. When using it, the fees are typically relatively minimal. Bitcoin transactions can be sent for fractions of the cost as we are used to from traditional banks and online payment processors, such as Visa and Paypal.

Think of the Lightning network as Bitcoin’s nimble sidekick, designed to handle a large volume of smaller transactions off-chain. Once the transactions are complete, they’re settled on the main Bitcoin blockchain. The Lightning Network dramatically reduces transaction fees and speeds up the process, making it feasible to use Bitcoin for everyday purchases. It’s like upgrading from a congested highway to a super-speed express lane.

Bitcoin vs. Visa vs. Paypal

Now, let’s bring in the big guns. How does Bitcoin, even with the Lightning Network, compare to giants like Visa and PayPal?

• Speed: Visa processes thousands of transactions per second (TPS), while PayPal handles hundreds. Bitcoin’s main chain can manage around 7 TPS, but with the Lightning Network, it can theoretically handle millions of TPS.

• Fees: Visa and PayPal have a structured fee system, often involving percentages of the transaction amount plus fixed fees. Bitcoin fees fluctuate based on network congestion. With the Lightning Network, however, Bitcoin transaction fees are mere fractions of a cent, making it a strong contender.

• Decentralization: Here’s where Bitcoin truly shines. Unlike Visa and PayPal, which are centralized systems, Bitcoin operates on a decentralized network, giving users more control and security over their transactions.

How to Buy Bitcoin?

The easiest way to buy Bitcoin is through crypto exchanges such as Binance, Coinbase, Kraken, or Bitstamp. Trusted exchanges make it easy to buy, sell, send, receive, and store BTC using public and private keys.

The registration and purchase process is straightforward and works as follows (example for Binance):

1. Create a free account on a crypto exchange: either via the website or the mobile app

2. Choose how you want to buy Bitcoin (BTC): click “Buy Crypto,” and choose to buy by credit/debit card, bank transfer or third-party payment

1. Confirm your purchase order: you have 1 minute to do this after one minute your order will be recalculated based on the current market price

3. Bitcoin (BTC) is now stored in your account: you can leave it on the exchange or withdraw it to your other crypto wallet

You can store Bitcoin in a cold or hot wallet:

Hot Wallet

Cryptocurrency can often be stored on crypto exchanges, which create a hot wallet next to your account. Such solutions can be accessed via a computer browser, desktop computer, or smartphone app. It’s a very simple way to store cryptocurrencies, but we recommend a cold wallet for maximum security.

Cold wallet

A crypto cold wallet, often called “cold storage,” is a cryptocurrency wallet that operates offline and is disconnected from the internet. It’s a method of storing cryptocurrency securely without any online accessibility, making it immune to online hacking attempts, malware, and other vulnerabilities associated with internet-connected devices. It’s an encrypted physical USB-like portable device that can download and transfer your bitcoins. Provides maximum security for cryptocurrency storage.

Choosing the right exchange

The most common way to buy Bitcoin is through cryptocurrency exchanges. There are two main types of crypto exchanges:

• Centralized Exchanges (CEX): These are platforms like Coinbase, Binance, and Kraken. They’re user-friendly, ideal for beginners, and offer a variety of cryptocurrencies. However, remember that you’re entrusting your funds to a third party.

• Decentralized Exchanges (DEX): Platforms like Uniswap or Sushiswap allow peer-to-peer trading without intermediaries. They offer more privacy but might be a tad complex for newcomers.

How to safely store your Bitcoin?

As any seasoned crypto sailor will tell you, acquiring treasure is only half the battle; the real challenge lies in safeguarding it. So let’s make sure your Bitcoin remains the same once you have it:

1. Use a safe virtual wallet: The safest option is a hardware wallet, which stores your Bitcoin offline.

2. Secure your environment: Regularly update your wallet software to ensure you have the latest security enhancements. Also, ensure your antivirus & firewall are always active and updated.

3. Two-Factor Authentication (2FA): Activate 2FA for an added layer of security on exchanges and online wallets.

4. Secure your private keys: Sometimes old schools prove to be the safest: Write your private keys on a paper and save it.

Bitcoin: Pros and Cons

Benefits of Bitcoin:

• Decentralization at its Finest: Bitcoin operates without a central authority, ensuring no single entity can control or manipulate the currency. It’s the financial world’s answer to a democratic utopia.

• Irreversibility of transactions: Bitcoin is similar to cash in that transactions cannot be reversed by the sender. On the other hand, credit cards, conventional online payment systems, and bank transactions can be reversed after payment has been made – sometimes months after the initial transaction – thanks to centralized intermediaries that execute the transactions. This means a higher risk of fraud for merchants, which can lead to higher credit card fees.

• Limited Supply: With a capped supply of 21 million coins, Bitcoin is designed to combat inflation. This scarcity mimics precious resources like gold, earning it the moniker “digital gold.”

• Security: Thanks to the power of blockchain technology, once a Bitcoin transaction is confirmed, it’s set in digital stone. This makes the network resistant to fraud and censorship. In more than 15 years of existence, the Bitcoin network has never been successfully hacked. Because the system is permissionless and open source, countless computer scientists and cryptographers have been able to study every aspect of the network and its security.

• Privacy: There are no bank statements for Bitcoin transactions or the need to provide unnecessary personal data to the merchant. Bitcoin transactions do not contain any identifying information other than the Bitcoin addresses and the amounts involved.

• Bitcoin investment potential: Bitcoin is still a very young technology. Many investors, large and small, are betting that as Bitcoin matures, trust and widespread use will increase, and its value will rise. By comparison, gold has a market capitalization of 12.8 trillion, while Bitcoin has a market capitalization of less than 1 trillion dollars (at the time of writing).

Risks of Bitcoin:

• Price volatility: While the price of Bitcoin is significantly higher than in previous years, the eagerness of buyers has varied greatly depending on the timing of their investment. For example, those who bought in 2017, when the bitcoin price was close to $20,000, had to wait until December 2020 to recoup their losses.

• Security concerns: Although supporters claim that the blockchain technology behind Bitcoin is even more secure than traditional electronic money transfers, there have been several high-profile hacks in the past. For example, in May 2019, more than $40 million in Bitcoin was stolen from several high-net-worth accounts on the cryptocurrency exchange Binance. The crypto exchange subsequently recovered the losses.

• Technological Limitations: The current version of Bitcoin faces scalability issues, handling only a limited number of transactions per second. Solutions are in the works, but they’re still maturing.

Bitcoin regulation

From Bitcoin’s inception, its decentralized nature posed a conundrum for regulators. As Bitcoin’s popularity soared, so did the calls for regulation. From the U.S. SEC’s stance on Bitcoin as a commodity to China’s outright ban on crypto exchanges, the regulatory landscape is as diverse as the crypto ecosystem itself. Some nations, like Switzerland and Malta, have emerged as crypto havens, while others tread cautiously. El Salvador, for example, stands out in this regard, where Bitcoin was declared legal tender in 2021.

Conclusion

Bitcoin is and will always be the king of cryptocurrencies and one of the major milestones in the financial revolution. It was the first cryptocurrency and is intended to be used as a form of payment outside of legal tender. Since its launch in 2009, Bitcoin’s popularity has soared, and its use has expanded, giving rise to a number of new competing cryptocurrencies (Ethereum, Cardano, Solana…). Although the process of creating Bitcoin is complex, investing in it is more straightforward. Investors and speculators can buy and sell bitcoins on crypto exchanges. However, as with any investment, make sure you don’t invest more than you are willing to lose.

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