By the 20th century, alternative payment methods to cash have merged. In 1950, the first universal credit card was issued to purchase things at various establishments. Until 2009, amid the turmoil of the Great Recession, another high-tech alternative to fiat currency was created and since then has sparked a lot of buzzes: Bitcoin.
You order a pizza. You pay the delivery boy in cash, and everyone is happy. This simple transaction is possible because of several factors:
- There is a complete transfer of value; you can’t pay twice using the same bills.
- You don’t need a third party to verify the transaction.
- The transaction can be tracked and recorded easily.
- The supply of currency is limited and regulated by authorities.
Forms of value exchange take many forms, including cowrie shells and even rocks. However, digital currency such as Bitcoin is a different ball game altogether. It’s worth learning how Bitcoin transactions work in more depth, but for now, this guide will touch on what Bitcoin actually is and how it enables the effective transfer of money digitally.
What Is Bitcoin?
Bitcoin is a decentralised digital currency created in January 2009, following the ideas put forward in a white paper by a purportedly pseudonymous individual named Satoshi Nakamoto. The true identity of Satoshi remains a mystery to this day. Many people have claimed to be the elusive Bitcoin creator, but none has proven their claims beyond a doubt.
The timing was significant since Satoshi wanted to create a financial system that was outside the purview of any regulatory authority such as banks or government authorities. That presented unique challenges:
- The system would have to be trustless. That is, two strangers online would have to be able to transact with the system without the need for a trusted third-party
- Given how vulnerable digital systems are, the system would have to be foolproof. It couldn’t have people creating “money” out of thin air
- Protected against double-spending. That means users shouldn’t be able to simply “copy” their money or use the same money to pay for things twice.
- The ability to transcend the many issues associated with geographical borders and financial jurisdictions
Satoshi relied on three novel technologies to solve these problems, at the bottom of which is pure math. If you haven’t read our piece on what is blockchain, now would be a good time to do so to gain some foundational knowledge.
Bitcoin is known as a kind of virtual currency or cryptocurrency since it’s secured via cryptography. There are no physical Bitcoins, only balances maintained on a public ledger that is transparently accessible to everyone (although each record is encrypted). All Bitcoin transactions are validated using a vast amount of computational power via a process called “mining.”
Bitcoin was created with the aim of providing lower transaction costs than those of existing online payment methods. Unlike government-issued currencies, it is regulated and verified without the need for a central authority. Although Bitcoin is not legal tender in several parts of the globe, it has increasingly exploded in popularity and sparked the creation of hundreds of additional cryptocurrencies, commonly known as altcoins. Bitcoin is usually abbreviated as BTC when traded on cryptocurrency exchanges.
KEY TAKEAWAYS
- First introduced by Satoshi Nakamoto in 2009, Bitcoin is currently the world’s biggest cryptocurrency in terms of market capitalisation.
- Unlike fiat money, Bitcoin is produced, circulated, exchanged, and kept through a decentralised ledger system called a blockchain.
- As a store of wealth, Bitcoin’s value swings based on supply and demand, investor and user sentiments, government laws, and media frenzy.
- As the first virtual currency to achieve mainstream adoption and great success, Bitcoin set the benchmark for the development of many other cryptocurrencies.
Understanding Bitcoin
The Bitcoin system consists of a network of computers (sometimes referred to as “nodes” or “miners“) that collectively run Bitcoin’s code and store its blockchain. A blockchain may be thought of figuratively as a collection of blocks. Each block contains a series of transactions. In the Bitcoin system, nothing is hidden because the exact time and sequence of each new transaction are recorded and publicly transparent.
Regardless of whether they operate a Bitcoin “node” or not, anyone can see these transactions in real-time. To carry out nefarious conduct, a bad actor needs to control 51% of the computing power that makes up Bitcoin. As of mid-November 2021, Bitcoin has approximately 13,768 full nodes, and this number is rising, making such an attack very improbable.
However, were an attack to occur, Bitcoin miners—individuals who participate in the Bitcoin network through their computers—are likely to split off to a different blockchain. This makes the bad actor’s endeavour to achieve the attack such a waste.
Bitcoin token balances are maintained by public and private “keys,” which are long strings of numbers and characters connected via the mathematical encryption method that generates them. The public key (which is analogous to a bank account number) is the public address to which others may transfer Bitcoin.
The private key (similar to an ATM PIN) is intended to be a closely guarded secret used only to authorise Bitcoin transactions. Bitcoin keys are not to be confused with a Bitcoin wallet, a virtual or physical device that facilitates Bitcoin trading and enables users to monitor their coin ownership. The term “wallet” is quite deceptive since Bitcoin is never held “in” a wallet but instead distributed through a blockchain.
We have a specific news feed on Coin Culture covering everything Bitcoin-related, including world economy, exchange rates and money politics.
How Does Bitcoin Get Its Value?
I’m sure you have wondered how a digital token such as Bitcoin gains its value.
If one Bitcoin token is essentially a block of transactional data, how did it become worth $63,000 at its peak? That is accomplished by associating it with valuable resources like electricity.
The process of hashing and authenticating new data blocks was made incredibly difficult through the use of complex mathematical functions. The energy and computing resources required to do this imparts value to the data blocks created.
In the Bitcoin ecosystem, the computer/node/user that first performs this calculation is rewarded with a percentage of the transaction fee. This system incentivises users in the network to participate actively in the creation and verification of new transactions in the ecosystem.
Peer-to-Peer Technology
Bitcoin is among the first digital currencies to use peer-to-peer (P2P) technology to enable instant payments to anyone. Bitcoin “miners,” those who possess the governing computing power and participate in the Bitcoin network, are in charge of validating new transactions and recording them on the global ledger. Miners are motivated by rewards: the creation of a new Bitcoin with each new block and the small transaction fees paid in Bitcoin from all of the block’s transactions.
These miners can be regarded as the decentralised authority that ensures the credibility of the Bitcoin network and enforces its security. A fixed but periodically declining number of Bitcoins are distributed to miners. There are only a maximum of 21 million Bitcoins that can be mined. It’s estimated that there is more than 18.875 million Bitcoin in existence as of November 2021 and that there are fewer than 2.125 million Bitcoins remaining to mine.
In this regard, Bitcoin and other digital currencies work differently from fiat currencies. Specifically, in centralised banking systems, the money is issued at a pace that corresponds with the economy’s growth; this is designed to preserve price stability. By contrast, a decentralised system like Bitcoin decides the release rate ahead of time and based on the algorithm.
Bitcoin Mining
Bitcoin mining farm (source iStockphoto.com)
Bitcoin mining is the process through which Bitcoin is put into circulation. Generally, a Bitcoin block is mined roughly every 10 minutes when miners find a solution to a highly complex computational puzzle called proof of work. By monitoring new transactions throughout the Bitcoin network, miners keep the blockchain consistent and prevent double-spending.
As record-keepers who verify the transactions, miners receive rewards each time the new block is built, usually in the form of native currency, a small transaction fee or both. The reward is halved every 210,000 blocks or approximately every four years. In 2009, the block reward was equal to 50 new Bitcoins. On May 11, 2020, the third halving took place, reducing the incentive for each block discovery to 6.25 Bitcoins.
Bitcoin may be mined using a number of different types of hardware. However, it is possible to earn more rewards by using specific computer chips, known as application-specific integrated circuits (ASICs), and more complex processing units, such as graphic processing units (GPUs). These complicated mining processors are known as mining rigs in the Bitcoin mining industry.
Unlike other currencies, Bitcoin is currently divisible to eight decimal places, and the smallest unit in the Bitcoin monetary system is a Satoshi or 0.00000001 BTC. The Bitcoin’s divisibility contributes to its wide adoption because it facilitates micropayments impossible with traditional currencies. If necessary and if the participating miners agree to the change, Bitcoin may someday be made divisible to even more decimal places.
Early Timeline of Bitcoin
Aug. 18, 2008
The domain name Bitcoin.org is registered and owned by Bitcoin’s first two developers, Satoshi Nakamoto and Martti Malmi. This marks the first major milestone in the history of Bitcoin and cryptocurrencies.
Oct. 31, 2008
The pseudonymous person or group of people Satoshi Nakamoto posted to the Cryptography Mailing List: “I’ve been working on a new electronic payment system that’s entirely peer-to-peer, with no trusted third party.” This is now the white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” published on Bitcoin.org.
Jan. 3, 2009
The original Bitcoin block, known as Block 0, is released. This is also referred to as the “genesis block”, whose code is embedded with the quote: “The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks” The first 50 Bitcoins within the first block remain untradeable and it takes six days to mine the next block, known as Block 1.
Jan. 8, 2009
The release of version 0.1 of the Bitcoin software is announced on The Cryptography Mailing List.
Jan. 9, 2009
Block 1 is mined, and Bitcoin mining starts in earnest.
Jan. 12, 2009
The first BTC transaction is conducted between two people, and the only other person is known to have been the recipient of Bitcoin from Satoshi Nakamoto. Satoshi Nakamoto sent 50 to the revered cryptographer Hal Finney in block 170.
Who Is Satoshi Nakamoto?
Nobody knows who was the Bitcoin creator, or at least not conclusively. The pseudonymous person(s) Satoshi Nakamoto, who introduced the initial Bitcoin white paper in 2008 and worked on the original Bitcoin software released in 2009, is credited with creating Bitcoin. However, as of 2022, the true identity (or identities) of Satoshi Nakamoto has remained shrouded in mystery, although many claimed to be the brains behind Bitcoin.
Although it seems tempting to accept the media’s portrayal of Satoshi Nakamoto as a single, quixotic genius who built Bitcoin out of thin air, such inventions are not typically made in a vacuum. The foundation of all significant scientific discoveries, no matter how seemingly original they are, can be traced back to previously conducted research.
There are many predecessors to Bitcoin, including Adam Back’s Hashcash, Wei Dai’s b-money, Nick Szabo’s bit-gold, and Hal Finney’s Reusable Proof of Work. The Bitcoin white paper itself refers to Hashcash and b-money and other research papers in multiple scientific domains. Perhaps predictably, many of the persons behind the other projects described above have been considered to have also had a role in the Bitcoin creation.
There are a variety of probable reasons for Bitcoin’s creator(s) to maintain their anonymity. A justification is that those who develop alternative currencies are more likely to draw the attention of the authorities. Particularly, when Bitcoin has grown in popularity and has become something of a global phenomenon, Satoshi Nakamoto would be likely in the spotlight of the media and governments.
In addition, it is possibly due to the potential of Bitcoin to create significant upheaval in the present banking and monetary institutions. If Bitcoin were to attain mainstream adoption, it could overtake fiat currencies issued by governments. The threat Bitcoin poses to traditional currencies may prompt governments to take legal action against Bitcoin’s founder.
According to the available data for 2009, 32,490 blocks were mined, resulting in a total payout of 1,624,500 Bitcoin. It is assumed that only Satoshi and probably a few other individuals were mining throughout 2009 and that they own most of that stash of Bitcoin. Those with large Bitcoin holdings could become a juicy target for thieves, particularly given that Bitcoin is less like stocks and more like cash, with the private keys required to authorise spending. Therefore, remaining anonymous is advisable for Satoshi Nakamoto to ensure his safety.
Special Considerations
Bitcoin as a method of payment
Bitcoin can be accepted as a payment method for goods and services across a plethora of industries. Brick-and-mortar establishments may display a sign that reads “Bitcoin Accepted Here,” and transactions can be made with the appropriate hardware terminal or wallet address by scanning QR codes or using touchscreen applications. It is simple for an online business to accept Bitcoin by adding this payment method to its existing ones, such as credit cards, PayPal, etc.
The entrants into the crypto space by major banks and firms like Visa and PayPal, and the commercial adoption by companies like Overstock, Tesla, and Subway, all provide compelling reasons to assume that Bitcoin will be more widely adopted as a method of payment. In June 2021, El Salvador became the first country to legally recognise Bitcoin as legal tender, making it the first country in the world to do so.
Bitcoin employment opportunities
Those self-employed may get paid for work related to the Bitcoin industry. There are various methods for doing this, including the creation of any online service and adding your Bitcoin wallet address as a payment method to the site. There are also a number of websites and work & employment forums that are solely devoted to digital currencies, including the following:
- Jobs4Bitcoins is part of Reddit.com.
- BitGigs describes itself as “a Bitcoin job board.”
- Bitwage allows users to select a proportion of their income to be converted into Bitcoin and delivered to their Bitcoin address.
How to Invest in Bitcoin
Many Bitcoin proponents tout that digital currency represents the future of finance. They argue that it offers a much faster and lower-cost payment mechanism for transactions worldwide. Despite not being backed by any government or central bank, Bitcoin can be traded for traditional currencies. Its exchange rate against the dollar attracts prospective investors and traders interested in the crypto-verse. Indeed, the rise of digital currencies such as Bitcoin results from its ability to serve as a viable alternative to national fiat money and conventional commodities such as diamonds or gold.
The Internal Revenue Service (IRS) announced in March 2014 that all virtual currencies, including Bitcoin, will be taxed as property rather than as cash. While Bitcoin stored as capital will be subject to capital gains or losses, Bitcoin held as inventory will incur ordinary gains or losses. Sales of Bitcoin you mined or acquired from another person, and the use of Bitcoin to pay for goods and services are examples of transactions that may be taxed in certain countries.
The notion of purchasing cheap and selling high applies to Bitcoin, just as it does to any other asset. You can trade Bitcoin via trading services and venues, including crypto exchanges, payment services, and brokerages. Among these, cryptocurrency exchanges are the most popular option as they provide a breadth of features and a wide range of cryptos for trading.
Risks Associated With Bitcoin Investing
Because of its remarkable price growth in recent years, Bitcoin has become a popular investment vehicle for speculative investors. At the end of December 2018, the price of Bitcoin was $7,167.52, and one year later, it had skyrocketed by more than 300% to $28,984.98. It continued to rise in value during the first half of 2021, reaching a record high of more than $68,000 in November 2021.
As a result, many individuals acquire Bitcoin for its investment potential rather than its capacity to function as a medium of exchange. However, owing to the absence of a fixed value and its digital nature, the acquisition and usage of Bitcoin entails several inherent risks. In recent years, several investor warnings have been issued by the US Securities and Exchange Commission (SEC), the US Financial Industry Regulatory Authority (FINRA), the US Consumer Financial Protection Bureau (CFPB), and other regulatory agencies.
Although the notion of virtual currency is still relatively new compared to conventional investments, Bitcoin has a very short track record and a relatively short history of credibility to back it up. With its growing popularity, Bitcoin is becoming less experimental each day; still, after just a decade, all virtual currencies are still in the development phase. Founder and CEO of Digital Currency Group, which creates and invests in Bitcoin and blockchain startups, Barry Silbert, believes that investing in Bitcoin and blockchain technology is “very much the highest-risk, highest-return investment that you can possibly make.”
Regulatory risk
Putting money into any of the cryptocurrencies is not for those who are afraid of risks. Bitcoin is a rival to the government-issued currency and may be used for various purposes, including underground market transactions, illicit activities, money laundering and tax evasion. Governments may attempt to regulate, limit, or outright prohibit the use and trading of Bitcoin (and some countries have already enacted Bitcoin regulations).
For instance, in 2015, the New York State Department of Financial Services finalised regulations requiring firms that purchase, sell, transfer, or store Bitcoin to keep track of their customers’ identities, employ a compliance officer, and maintain sufficient capital reserves. Any transaction with a value of $10,000 or more is obliged to be documented and reported. The absence of transparent and uniform laws on Bitcoin (and other virtual currencies) raises concerns about their liquidity, universality and stability.
Security risk
Most people who own and use Bitcoin have not got their tokens via Bitcoin mining operations. Instead, they trade Bitcoin and other digital currencies on many popular online marketplaces, such as Bitcoin exchanges or cryptocurrency exchanges. Bitcoin exchanges are entirely digital, and like with any virtual system, they are susceptible to hacking, malware, and other operational issues.
An attacker who obtains access to a Bitcoin owner’s computer hard disk and steals the private encryption key can transfer the stolen Bitcoins to a different wallet. Users can only avoid this by storing their Bitcoin on a computer not connected to the internet or using a paper wallet containing printed private keys and addresses instead of keeping them on a computer.
Aside from Bitcoin exchanges, hackers may acquire access to thousands of accounts and digital wallets where Bitcoin is held to steal Bitcoin. Mt. Gox, a Bitcoin exchange in Japan, was forced to shut its doors after millions of dollars worth of Bitcoin were stolen in a hacking event that took place in 2014.
All Bitcoin transactions are permanent and irrevocable, making this extremely troublesome. Transactions using Bitcoin are similar to those involving cash in that they can only be reversed if the person who got them sends it back to the sender. There is no third party or payment processor, as there is in the case of a credit or debit card, and hence no source of protection or recourse should the transaction issue occur.
Insurance risk
There are several investments that are protected by the Securities Investor Protection Corporation (SIPC). Normal bank accounts are protected and insured by the Federal Deposit Insurance Corporation (FDIC) up to a particular amount, which varies based on the jurisdiction.
However, Bitcoin exchanges and Bitcoin accounts are not covered by any form of federal or government program. SFOX, a primary dealer and trading platform, said in 2019 that it would offer FDIC insurance to Bitcoin investors, but only for the part of transactions that included cash.
Fraud risk
Although Bitcoin employs private key cryptography to authenticate owners and record transactions, fraudsters and scammers may try to sell counterfeit Bitcoin. For example, in July 2013, the Securities and Exchange Commission (SEC) filed a lawsuit against a Bitcoin-related Ponzi scam operator. Additionally, many cases of Bitcoin price manipulation, which is another widespread kind of fraud, have been documented these days.
Market risk
The value of Bitcoin may vary, just as with any other investment. Indeed, throughout its brief history, Bitcoin has undergone several boom and bust cycles. The crypto market is susceptible to any significant developments that may determine the buying and selling volume on cryptocurrency exchanges. According to the Consumer Financial Protection Bureau (CFPB), the price of Bitcoin plummeted by 61% in a single day in 2013, while the largest one-day price decline in 2014 was as high as 80%.
If fewer individuals decide to accept Bitcoin as a form of payment, the value of these digital units may decline, and they may eventually become worthless. Indeed, as the price of Bitcoin fell from the all-time high during the cryptocurrency craze of late 2017 and early 2018, there was widespread conjecture that the “Bitcoin bubble” had burst.
There is currently so much competition already in place, and Bitcoin has a massive lead over hundreds of other virtual currencies. This dominance of Bitcoin results from venture capital funding and its brand recognition. In fact, any technological breakthrough in the form of even better virtual coins always poses great menaces.
Splits in the Cryptocurrency Community
Since Bitcoin’s inception in 2009, there have been several circumstances where conflicts between groups of miners and developers have resulted in large-scale divisions in the cryptocurrency ecosystem. In some cases, it’s reported that groups of Bitcoin users and miners altered the Bitcoin network protocol.
This process is referred to as “forking,” and it often leads to the development of a new kind of Bitcoin with a new name. This split is possibly a “hard fork,” in which a new coin will share transaction history with Bitcoin up to a decisive split point, where a new token will be generated. Among the cryptocurrencies that have been produced as a consequence of hard forks are Bitcoin Cash (August 2017), Bitcoin Gold (October 2017), Bitcoin Atom (January 2018) and Bitcoin SV (November 2018).
In the crypto world, a “soft fork” refers to a protocol update still compatible with the previous system regulations. For instance, Bitcoin soft forks have introduced new features like the segregated witness protocol (SegWit).
Bitcoin Information You Should Know
With the technicalities out of the way, let’s learn something even more fun.
- Transacting in Bitcoin is completely anonymous. The transaction data is cryptographically hashed, leaving only a complex string of characters as the sole identifier
- There will only ever be 21 million Bitcoins created. Currently, only about 5 million remain to be mined
- Bitcoin has intrinsic value due to the cost of resources required to solve the cryptographic puzzles required to create new tokens
- Once Bitcoin was accepted by the community, it became a practical form of digital currency.
- Bitcoin isn’t the only cryptocurrency, but it was the first and still the most popular. Others include Ethereum, Tether, and the Binance Coin. BTC currently accounts for 46% of the industry, which itself is valued at over $2 trillion
- Bitcoin isn’t just a form of currency. It is a programmable platform where the transactional data block can be codified by the buyer and seller. Other cryptocurrencies such as Ethereum allow the use of conditional smart contracts for even more versatile transactional capability
- Bitcoin is a legitimate commodity that you can trade-in in the US as well as in many other countries of the world
- Over 100,000 merchants and big businesses currently accept Bitcoin as a form of payment. El Salvador recently made it legal tender in the country
- If you lose your Bitcoin, forget your wallet password, or send them to the wrong person, they are unrecoverable.
How to Use in Bitcoin: Wallets, Trading, and Transacting
Our “Bitcoin for beginners” guide wouldn’t be complete without showing you how to get involved. However, be aware that the cryptocurrency market is completely unregulated. If you lose your money in the market, there are no redress options available.
Secondly, the value of Bitcoins and other digital assets fluctuates wildly. If you choose to trade in and with Bitcoin, be prepared to lose your whole investment. Nothing in this guide is to be taken as investment or legal advice.
With that, you should know that owning and transacting with Bitcoin is now as easy as opening a Paypal account. All you need is a digital wallet to get started.
- Open a digital wallet with a service such as CoinSpot or Trustwallet. The wallet is a secure location where you can store your digital currency and is also necessary for trading.
- Using your bank or card, buy Bitcoin from a reputable crypto exchange in Australia such as CoinSpot or Coinjar
- From there, you can earn more Bitcoins either by buying more, getting paid in BTC, or trading.
- Transferring your Bitcoin, simply use the “Send” options provided by your wallet provider.
FAQ
Why Is Bitcoin Valuable?
Over a decade, Bitcoin’s price has increased exponentially, from below $1 in 2011 to over $68,000 in November 2021. Various factors contribute to the value of Bitcoin, such as market supply and demand, the marginal cost of production, and governmental regulations. As a result, although Bitcoin is an intangible asset, it has a high value, with a total market capitalisation of $1.11 trillion as of November 2021.
Is Bitcoin a Scam?
Although it is virtual and cannot be touched, Bitcoin is unquestionably real. Bitcoin has been in existence for more than a decade, and the system has proved to be reasonably reliable over that time. Furthermore, the computer code that operates the system is open-source, meaning that it can be accessed and downloaded by anybody for bug defects or signs of malicious activity. Of course, fraudsters may try to scam individuals out of their Bitcoin or hack websites such as cryptocurrency exchanges. However, these are faults in human behaviour or third-party apps rather than issues in Bitcoin itself.
How Many Bitcoins Are There?
The total amount of Bitcoins that will ever be generated is 21 million, with the final Bitcoin being mined somewhere around the year 2140. At the end of November 2021, more than 18.85 million Bitcoins had been mined, accounting for about 90% of the total. Researchers also estimate that up to 20% of those Bitcoins have been “lost” due to someone forgetting their private key, passing away without leaving any access instructions, or transferring Bitcoins to inaccessible addresses.
Should I Capitalise the B in Bitcoin?
There is no uniform convention for Bitcoin capitalisation, but some sources use the word Bitcoin with the capital letter B in reference to the Bitcoin network, protocol, or system. When referring to individual Bitcoins as a unit of value, the lowercase “b” is used (for instance, I sent two Bitcoins).
Where Can I Buy Bitcoin?
Bitcoin ATM in a mall allows to buy and sell Bitcoin crypto. Orange BTC cryptocurrency exchange machine.
Warsaw, Poland – October 23, 2021 (Source: iStockphoto)
It is possible to acquire Bitcoin via a number of different online exchanges. Aside from that, Bitcoin ATMs, which are internet-connected machines, can be used to purchase Bitcoins using credit cards or cash. Alternatively, if you have a buddy who possesses Bitcoins, you can buy directly from him, with no need for any kind of exchange.
