What is Bitcoin? Bitcoin Explained

Written by Robert Ferry on March 31, 2022
What is Bitcoin? Bitcoin Explained

The 21st Century was introduced with the concept and practical application of the world's first digital currency known as Bitcoin. Bitcoin became the first cryptocurrency accepted globally where people could make digital transactions with one another in digital money. Since bitcoin is a cryptocurrency, it only involves peer-to-peer transactions on the internet.

People often use several financial services like PayPal, which requires a traditional financial system. Under this system, permission is required for the transactions to be approved. But bitcoin does not work in that manner as any banks or governments do not control it. It is completely decentralized, such as any two people in the world can exchange digital money. For instance, person A and person B can send bitcoin to one another without interfering with any financial institution or governing body.

Just like the banking industry has a proper mechanism that tracks every transaction each individual is carrying out, so does bitcoin. With bitcoin, the only difference is that all the transactions are tracked on the blockchain. The blockchain is like a digital ledger that records all accounts and transactions going in and out. So, all the transactions made using bitcoin are kept in a record with the help of the blockchain.

The bitcoin blockchain keeps an overview watch of all the accounts that are trading bitcoins. It does so by keeping control across the entire network. Moreover, the blockchain is independent of any company, country, or third party. This would mean that no other organization has control over it.

Bitcoin has a cap on it, which means that no factors can fluctuate its value or even manipulate it since there is a limit imposed on it. The limit is set at 21 million bitcoins. And the limit cannot be changed under any circumstance. That is what makes bitcoins so unique from other traditional currencies.

The article will cover the basics of bitcoin and help understand how it works. We will further discuss how to get bitcoin which consists of the bitcoin mining process, and highlight how it could be used and invested. We will also look at the pros and cons of bitcoins.

Let us look at bitcoins basics to help any beginner understand this cryptocurrency.

Fundamentals of Bitcoin

Ever since bitcoin was introduced, countless cryptocurrencies have come into existence. But that did not stop bitcoins' growth as it is still the largest cryptocurrency traded per market capitalization and trading volume.

Bitcoin has several goals that make it so invaluable; they include the following:

  • A profitable investment
  • Alternative to gold in terms of value and digital footprint
  • A route to send value across the world without any financial body oversight
  • An opportunity to explore a digital monetary technology

Bitcoin is a Digital Currency Native to the Internet

Governments around the globe have different currencies that represent their country. Some famous currencies traded worldwide include the dollar, euro, pound sterling, etc. All transactions have to involve an intermediary. The intermediary, in this case, is usually a bank serving as a middle-man in the trade. And all such banks charge a certain fee for their services.

Bitcoin is independent of any such intermediary and involves no banks, middle-man, or governing body, not even a country, to overlook transactions. All such trade is carried out between two people, a buyer, and the seller. And a record of such transactions is kept on the blockchain.

Bitcoin has brought freedom to finance and business where people can trade as they feel like without any deductions or charges. The cryptocurrency is traded on the internet relatively more efficiently and effectively. All such individuals involved in the trade of bitcoin are sole owners of the traders and are solely responsible for what they would like to do with it.

Bitcoin is Legal to Use, Hold, and Trade

People often wonder whether bitcoin is a scam that would lead to people losing everything they have invested in it. At the same time, some people believe it to be one big bubble that will pop at a moment when it is at its peak. Several financial experts have different views on it, but they all agree: "bitcoin is an investment." Whether we consider it an investment or not, people love the idea and its practicality, which gives that full freedom in monetary terms.

While some people do cater towards bitcoin as an investment, they also consider the pros of the investment, enabling them to make critical decisions. These essential decisions revolve around the digital currency paying for anything. People have used bitcoins to pay for their travel expenses and even make charitable donations to the unfortunate. Currently, no mandates have successfully claimed the bitcoin to be a hoax in the USA.

The market value of bitcoins speaks for itself where it is often seen used in large businesses as a currency of trade. Large multinational companies have also started accepting payments through cryptocurrencies. For instance, Microsoft provides its customers with an option to pay via cryptocurrency, including Bitcoin, Ethereum, etc.

Let us look at the mechanical nature of bitcoin.

How does Bitcoin Work?

Since any individual or company does not own a bitcoin, its operational mechanism is independent of any entity. Bitcoin opened doors for new opportunities as it became the world's first online platform and cryptocurrency to make transactions digitally. This would mean that anyone who has access to the internet can buy, hold, and sell bitcoins. The purpose of bitcoin was to give individuals the opportunity to make digital payments in a currency that does not rely on banks or other financial institutions.

Blockchain is an essential element of bitcoin, which is vital to understanding Bitcoin's operational mechanism. Blockchain is responsible for keeping track of the accounts that hold, buy and sell bitcoins. It is an element that keeps a record of all transactions and digital activities. Blockchain is decentralized, which means that no one can control it or manipulate it, but they can only view it.

The following steps will help you understand how bitcoin works.

Mining Rings Used to Verify and Record New Transactions

Mining rings are specialized computers that carry out specific equations to note down any new transactions related to bitcoin activity. These specialized computers are designed mainly to keep track of all new bitcoin transactions. These computers are massive and powerful and are typically owned by large businesses to mine bitcoins. The reason is that a massive surge of power is required to mine bitcoins, and ordinary computers cannot do that; hence these specialized computers are designed to fulfill that purpose.

Collective Computing Power of Mining Ring Ensures Blockchain Accuracy

The growth and accuracy of blockchain are directly related to the collective computing power of the mining rings, and bitcoin is the essential element is tied up with the blockchain. Every new bitcoin is recorded on the blockchain and all the other already existent bitcoins. That is why the process of blockchain and the factors directly linked to it are vital for the growth of bitcoin.

Bitcoin Network Assures the Mining Rings to Take Part in the Maintenance of the Blockchain

The bitcoin network carries out an ongoing lottery where all the mining rings are placed for the transaction. All such mining rings have one goal: to provide a solution to a mathematical problem, and winners will be announced every ten minutes. The winners will be responsible for adding new information to the blockchain. The new information corresponds to new transactions that are taking place. The raffle prize varies over time, so there is no set prize. The prize is always in terms of bitcoins' quantity, but the quantity can vary with each prize.

The bitcoin network was set up to ensure stability and prevent worldly affairs from manipulating the system, like in the case of banks and other financial institutions. The quantity of bitcoin is set at a limit that cannot be exceeded even by one unit. This quantity is engraved in the system and looks after the bitcoins and blockchain. The system will only accept 21 million bitcoins. It is believed that the last block of bitcoin will be mined later in the 22nd Century.

We will look at how anyone in the world can own a bitcoin.

How to Get Bitcoin?

The easiest way to get hold of bitcoin is to buy it from the designated cryptocurrency exchanges. These cryptocurrency exchanges work remotely and provide their services online, where the buy and sell process occurs. Such exchanges make the whole process convenient for anyone as they can buy, sell, and hold bitcoins.

Opening an account at such exchanges is as easy as opening a brokerage account. For instance, a person would need to enter their details and verify them. They will also need to add some funding source like a bank account as proof.

There are several cryptocurrency exchanges that people use to buy bitcoins. They include the following:

A bitcoin wallet is necessary for anyone that wishes to keep their bitcoins in a safe digital platform. The bitcoin wallet is segregated into two branches: one is called a hot wallet, and the other one is called a cold wallet.

A hot wallet, also known as an online wallet, is stored at an exchange where the person has opened the account, and the bitcoins are kept in that wallet saved in the cloud. Several hot wallet providers consist of Exodus, Mycelium, and Electrum which people can use to keep their bitcoins safe on the cloud.

Alternatively, a cold wallet is referred to as a mobile wallet. It is a device whose operations are not connected to the web or the internet, and its entire functions are fully offline. This wallet will keep your bitcoins saved on your phone or tablet, inaccessible to the internet or the cloud. Several cold wallet providers consist of Ledger and Trezor, so people can opt to store bitcoins offline.

To know more about the hot wallet and cold wallet, click here for more details.

There are several cryptocurrency exchanges like Gemini that provide some extra perks regards to bitcoins. For instance, people can opt for public and private keys, and they don't need to worry about holding the responsibility to keep the bitcoins to you.

If a person decides to store bitcoins at a place other than the online cryptocurrency exchanges, they would need to follow the steps below:

  • The bitcoin network consists of something called the public key, and it is allotted to anyone who joins the network. This key is unique to each individual, and it is just like an email address having many alphabets and letters. The individuals would also be allotted a private key, and it can be considered a password.
  • Buying or selling bitcoins would result in a public key generation, which could be considered a virtual vault where a person would keep all their funds. Since this public key is unique to everyone, it cannot be manipulated anyway. A person would use the public key to pay you with bitcoins. Hence, the public key can be shared with others. However, it would help to use the private key that should NOT be shared with anyone to access the vault.
  • All the bitcoins are stored in a virtual vault. People have an option where they can access their virtual wallet and transfer funds to their bank accounts by selling bitcoins. The cryptocurrency exchanges have mobile applications that make it easy to transfer funds. These apps are also prone to a daily transfer limit that should not be exceeded as a traditional bank. The funds' transfer will take some days before the transfer is complete.

We will look at how a bitcoin can be used by anyone who owns bitcoins.

How to Use Bitcoin?

Bitcoin transactions are similar to debit or credit cards, with a minor difference in the information to make the transaction possible. In the case of a credit card, a person would need to enter the card or account details and the person who owns them. But in the case of Bitcoin, the transaction would involve using the public key of the person to whom the payment is being sent along with the payment amount. And this process can be carried out with the help of any wallet app.

These wallet apps now come with a' QR code' feature.' This feature smooths the transaction process as you only need to scan it once, and the wallet app will handle the rest. All the relevant information that a person would need to enter to make the transaction is automatically entered with the help of the QR code.

Bitcoin offers flexibility regarding its usage, which differs from one person to another. There are several things that a person can do with the help of bitcoins. For instance:

  • At any cryptocurrency exchange, a person can sell their bitcoins or, in some cases, a fraction of a bitcoin in return for cash used for almost anything. There is now a bitcoin ATM that would convert the cryptocurrency to liquid cash.
  • Bitcoin debit cards are often used in transactions to make purchases through online or in-person stores. These cards operate similarly to any traditional credit or debit card.
  • Since bitcoin is an investment and the higher the risk, the more profit will be, individuals can do that if they feel like holding onto it would yield profitable results. Bitcoin is not just an investment strategy, but it can also be treated as savings to come into use after retirement.

The cryptocurrency world has expanded a lot and has opened the door for many new opportunities. One of such opportunities is called Bitcoin IRA. These are special retirement accounts that are now accessible for business. Many retired personnel have opened their accounts to yield profits and have their savings yearn for profits with an investment with bitcoin.

People have a different mentality on how they perceive the usage of bitcoins. Some people choose to hold onto it despite a decrease in its price. They take it as an invaluable opportunity whose price will fluctuate like any investment, but it will yield fruitful results in the future.

Alternatively, others do not perceive it as a long-term investment. They believe it to be a bubble that will pop unexpectedly, so it is wise to invest, and when the price is high, sell the bitcoins and earn profits from it. This is also known as a short-term investment.

People who have invested in bitcoin have different and varying mindsets. While some are rooting for price inflation so that they can earn profits from it, others want something different. This other class believes that bitcoin and other cryptocurrencies are a hoax, so they wish for a price decrease.

The bitcoin price fluctuates up and down, so no one can say with certainty what will come out of it. The price can go as low as$ 5000 to as high as $29,000. Both long-term and short-term investors are enjoying the perks of bitcoins financially.

Cryptocurrency has expanded to an extent where a person can buy shares from a bitcoin mutual fund. Several cryptocurrency mutual funds around the globe are continuously looking for people who would invest in their funds. A prime example of this would be Grayscale Bitcoin Trust (GBTC).

There are several such funds, but they all have specific requirements and would not let just anybody buy shares of their funds like that. One of such mainstream requirements is that the person must be an accredited investor. Such investors are usually worth a million, so a requirement to invest in a bitcoin mutual fund would earn at least $200,000 and be worth at least $1 million.

We will look at the benefits and drawbacks of bitcoins.

How is Bitcoin Different From Any Other Kind of Money?

There are mixed views of bitcoins and other cryptocurrencies and the kind of investment they could be. But it cannot be ignored that bitcoin is different from other currencies and has some pros that should be discussed to help new investors. We will also be looking at some drawbacks linked to bitcoin to draw a comparison.

Bitcoin Benefits

Below are the perks a person would enjoy by investing in bitcoin.

Bitcoin's Global Outreach

Bitcoin is just like any other currency that can be sent worldwide without any limit imposed on the sender regarding how much can be sent. Even though bitcoin is a virtual currency, it can be sent globally anywhere with access to the internet. The service is always available around the clock, accessible during weekends. Since your money is being sent across the country or any other place, there is no charge or fee. This is different from the traditional currency, which needs banks.

Bitcoin Transaction Cannot Be Reversed

In this case, a bitcoin transaction is like cash, which cannot be undone once paid. The same is with bitcoins; once it is shared using the vendor's public key, they cannot be reverted even if someone tried to manipulate the system. The advantage lies in the system's security built to prevent any manipulations.

Bitcoin holds this advantage against credit cards that involve using a centralized system like a financial intermediary, a bank, or a credit union over-seeing a transaction. In this case, there can be manipulation like fraud, theft, or even hacking. Suppose a person paid their dues, but months later, they have not been written off, and with an accumulation of APR, the amount will be high, and no one would believe that it was paid. Bitcoin does not share this fate, so investments are secure.

Bitcoin Ensures Privacy

No personal information like bank statements is required or recommended for any bitcoin transaction. No merchant would even ask for it as it is unnecessary. Whenever a bitcoin transaction takes place, the information is limited to the amount and the bitcoin addresses involved in the transaction. No other information is entailed in any bitcoin transaction. 

Bitcoin Brings Security

The bitcoin network has a cryptographic nature that makes it secure and not prone to any manipulations. So anything related to bitcoin is ensured safety. For instance, all bitcoin payments are flagged with only peer-to-peer transactions that do not exhibit the use of any centralized system making sure of its security. Compared to any credit card transactions that can be hacked or manipulated, bitcoin is different and is often considered a safe vault.

When a person makes a bitcoin payment or transaction, they are not required or advised to provide sensitive or personal information to the merchant vendor or anywhere on the internet. Relative to any banking or financial information that asks for such information before approving the funds. It is safe to consider that the bitcoin transaction is prone to low or no risk regarding the theft of financial information.

Bitcoin Network Brings Openness

Unlike standard credit cards or everyday financial transactions that stay hidden from the world and are only known to the individuals involved, bitcoin is different. Whenever any bitcoin transaction takes place by anyone and anywhere in the world, the bitcoin network tracks it down and publishes it openly for anyone to see, and there is nothing to hide from the world.

There is no exception for anyone that wishes to keep their transactions hidden from others. This would mean that no one can manipulate the system or the transactions that anyone carries out. The bitcoin software created by Satoshi Nakamoto is open-source, so anyone who feels the need to check out the code can do so freely without any hesitance.

Bitcoin's Potential for Significant Growth

Investors who deal with cryptocurrency believe that bitcoin will turn into a profitable investment in the future for those who hold onto it. They advise other younger investors of the perks of bitcoin once it is fully mature and the profits it would yield.

These investors also believe that with time greater trust and more use of bitcoin regarding transactions will follow as the use of hard cash will fade away in the future. Hence, Bitcoin will significantly grow in the future, and people should take advantage of it now more than ever.

Bitcoin is Decentralized

Bitcoin is a decentralized currency, meaning that no banks, financial institutions, government, or country have control over it. The bitcoin network is independent of any of the other networks that are in the banking industry. Because it is decentralized, it makes it impossible to manipulate or hack in any possible way. Cryptocurrency has been in the world for over a decade. Since it was introduced in 2009, not one report has revealed the system's incompetency.

Bitcoin Drawbacks

Apart from the apparent benefits that bitcoin and similar cryptocurrencies have over traditional currencies, there are some drawbacks too. In this section, we will discuss the weak points related to bitcoins.

Price Volatility

Bitcoin's price has seen varying changes over the year, with some people benefiting from it while others incurred losses. Bitcoin's price is not flexible and is prone to change now and then. This volatility made experts and investors think that bitcoin is just one big bubble.

Bitcoin's value has increased substantially over the years. While at its lowest, those who invested in it have profited for a lifetime or more. But this does not change investors' opinions who witnessed losses from their investments. For instance, the bitcoins price in 2017 was north of $20,000, which came crashing down, and it was not till 2020 that investors recovered from their losses. So it took almost three years to recover, which speaks about bitcoin and anyone wishing to invest in it.

In 2021 while bitcoin's price was high, it still showed signs of fluctuation towards the downside, making it a riskier investment.

Hacking Concerns

While the bitcoin network is strong and withstands any manipulation, there were times when the system failed the investors. While some call it a mechanical flaw, others call it a hack. One of the cryptocurrency exchanges went through a hack worth more than $40 million in bitcoin. The hack event cannot be ignored while the company recovered from the loss. More about this can be read here.

Limited Use

Although bitcoin usage is still growing, only some merchants accept payments through bitcoins at this stage. Large companies, too, are thinking of accepting payment through bitcoin-like Microsoft. But its spread is slow, making it inaccessible in places where the internet is available.

Not protected By SIPC

SIPC, the abbreviation for Securities Investor Protection Corporation, is an organization whose goal is to ensure the investors are safe from fraud any fraudulent activity. The SIPC insurance can go as high as half a million dollars if the brokerage is stolen or some fraud is suspected. However, the organization's goal does not affect bitcoin or any related cryptocurrency, which shows that investors are at risk. To know more about SIPC and what it protects, click here.

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Conclusion

With the inclusion of bitcoin and other similar cryptocurrencies, the world has entered a new age of technology, rendering hard cash currency of the past. But the growth of bitcoin is slow, and around the globe, businesses are trying to understand its implications and positivity regarding no fees, charges, and decentralized systems.

Investing in bitcoin is an investment, one that carries risk with it. Bitcoin is no different from any other investment as all investments are prone to risks, and the higher the risk, the greater is the reward. While some people take bitcoin to earn a profit, others see it as a long-term investment and worry less about the price fluctuation and more about its use and impact on the world.

There remain some class of people who wonder when the bubble of bitcoin will pop, while those who are smart and know how to welcome an opportunity benefit from it. The article has covered the basics you need to understand about bitcoin and how to invest it in businesses. We also covered the way bitcoin can be mined, and a detailed section covering its implications, both positive and negatives, was covered in another section.

Article written by Robert Ferry
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