What is Bitcoin
Bitcoin is a type of digital money that can be stored, exchanged and used for payments.
What makes Bitcoin different from national currencies such as the euro, the US dollar or the Japanese yen lies in its decentralised structure and the model on which it operates.
With centralised ‘fiat money’, the currency is issued by central banks and citizens have to use their country’s money. With the exception of cash, transactions are carried out through intermediaries such as banks and payment processors.
Unlike traditional currencies, Bitcoin is not issued by a central bank, neither is it backed by a government. As a result, inflation rates, monetary policy and economic growth indicators, which generally influence the value of currencies, do not have the same strong and direct impact on the largest cryptocurrency.
Bitcoin is a currency of choice that is controlled by the “consensus” or will of the majority of its users. The asset has a growing network of people who voluntarily agree to Bitcoin’s rules (protocol), which are a type of monetary policy.
They use the decentralised infrastructure to transact peer-to-peer (without intermediaries) and store value independently of any government, company or financial institution.
There is no need to seek permission to use Bitcoin and the risk of censorship is largely eliminated, with such censorship being at odds with the cryptocurrency’s ethos of decentralization.
What makes Bitcoin valuable?
Bitcoin is often compared to gold as it has very similar characteristics.
Both assets have a limited supply. There will only ever be 21 million BTC.
It is easily divisible. You can divide a single Bitcoin into 100 million parts. It is durable. A huge globally distributed network of independently managed computers tracks ownership of BTC.
Cryptocurrency is scarce and cannot be counterfeited. The only way someone could create fake Bitcoin is by committing so-called double spending. This refers to a situation where a user “spends” or transfers the same Bitcoin to two or more separate settings, effectively creating a duplicate record.
How does Bitcoin work?
Transactions with the currency are verified by network nodes through cryptography and recorded in a distributed public ledger called a blockchain.
A blockchain is a linked array of data made up of units called blocks. They contain information about each transaction, including details such as buyer and seller, time and date, total value and a unique identifier for each transfer.
The records are linked in chronological sequence, forming a numerical chain of blocks. When a block is uploaded to the blockchain, it becomes available for anyone to view, acting as a public record of Bitcoin transactions.
The blockchain is decentralized, meaning that there is not a single person or entity that controls it. The chain is not owned by anyone, but anyone can contribute to it. When different individuals successfully make changes to it, each copy is updated.
While the idea of anyone being able to edit a blockchain may seem dangerous, it is what makes Bitcoin reliable and secure. To be included in the Bitcoin chain, a transaction’s block must be confirmed by the majority of miners in the network.
According to the algorithms, new BTC coins are generated and made available to users who solve predefined mathematical problems.
Solving these problems (known as digging or mining) consists of knowing a number, a hash, which is a 64-digit hexadecimal number that is less than or equal to the target hash.
This process is significant because it helps verify and secure the transaction history of the Bitcoin network. Anyone who wants to contribute new transactions to the network must first engage in securing it through mining, which requires computing power. As a result, it would be difficult and very expensive for an attacker to even attempt to cause any harm to the network.
How exactly do transactions work?
While it is possible to handle coins individually, performing a separate transaction for each particle of BTC transferred would be inconvenient. Transactions have many inputs and outputs that allow for splitting and pooling of value.
Typically, there is either one input from a previous larger transaction, or multiple inputs combining smaller amounts, with two outputs at most: one for the payment and one to potentially return change to the sender.
Now imagine that Mario wishes to send Ana 1 BTC. He achieves this by signing a message containing transaction-specific information with his private key.
But what are inputs?
The inputs contain details of the Bitcoin previously delivered to Mario’s address. Let’s say that Mario received 0.6 BTC from Maria, and the same amount from George. Now, to deliver 1 BTC to Ana, there might be two inputs: one input for 0.6 BTC from Maria and one input for 0.6 BTC from Georgy.
What about outputs?
The first output is 1.2 BTC to Ana’s public address (twice 0.6). The second output is 0.2 BTC as change to Mario.
In this case, Mario will broadcast the intended transaction to the Bitcoin network via his wallet software. The inputs ( that is, the addresses from which Mario has previously received the Bitcoin he claims to own) are verified by the participants who perform the mining (provisioning/mining) on the network, known as “miners”.
Miners also create a block by combining a list of additional transactions broadcast on the network at the same time. Any miner that has executed a proof of work, or PoW, can propose a new block to be added to the chain or “linked” to it by referencing the previous block. The network is then informed of the release of the new block.
The other network participants (nodes) will hand it over if they agree that it is a valid block i.e. the transactions it contains meet all the protocol requirements and appropriately link to the previous block.
Another miner would then build on the block by referencing it in the following block. The next miner will have “verified” all the transactions that were added to the last block. The number of acknowledgements for the Mario transaction in the above example increases as more blocks are added to the chain.
Is Bitcoin anonymous?
Bitcoin is often referred to as “anonymous” because it can be sent and received without revealing personal information. However, achieving reasonable anonymity with BTC can be difficult, and complete anonymity may be out of reach.
In the Bitcoin network, each participant has an alias – this is the address where you receive Bitcoin. Every transaction that includes the address is recorded in the blockchain at all times. Every transaction will be linked to you if your address is ever associated with your identity. Bitcoin is therefore pseudonymous rather than anonymous.
The creation of Bitcoin
On October 31, 2008, an individual (or group of individuals) going by the pseudonym “Satoshi Nakamoto” published a document titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” which is the “white paper” on cryptocurrency.
A white paper is a report that gives readers information about an issue and presents a potential solution or philosophy to the writer.
Bitcoin’s white paper details a concept for a “peer-to-peer e-money system” – a global financial infrastructure based on cryptographic evidence instead of trust.
The purpose of the paper is to provide a comprehensive understanding of the flagship cryptocurrency, providing context for its creation, key events in its history, how it functions, descriptions of its unique properties, and guidelines for participating in this new financial paradigm.
When Satoshi unveiled his proposal for Bitcoin, it attracted the interest of a very unique online community of cryptographers and computer professionals, many of whom have been involved in similar projects and initiatives.
The goal of the pseudonymous creator of Bitcoin was to build a financial infrastructure with a minimum level of trust that could be maintained for years to come.
Instead of building a brand new solution, he leveraged previous research in distributed systems, financial cryptography, network security, and more.
After Satoshi sent in his proposal for a new digital money system, the project became the subject of discussion among an online group of cryptographers and computer scientists. Satoshi wrote much of the Bitcoin codebase before the white paper was published, but opened it up for public scrutiny.
From the beginning, Bitcoin was an open source software project built and maintained by a community of developers and enthusiasts. On November 8, 2008, BTC was registered on the open source software development platform SourceForge.
On January 3, 2009, the first block, called the genesis block, of Bitcoin was mined by Satoshi within seven days. In this initial transaction, also called a “coinbase,” Satoshi included a headline from the Times Magazine.
The Times 03/January 2009 Chancellor is on the verge of a second bank bailout
This announcement was a clear signal of Bitcoin’s intentions. As the world was going through the biggest financial crisis since the Great Depression, a new vision of a monetary system separate from the state was emerging.
On January 12, 2009, the first post-Bitcoin transaction took place between Satoshi and renowned software developer Hal Phinney in block 170. It is also claimed that Phinney was the first person to mine BTC alongside Satoshi after the launch of the network.
On April 26, 2011. Satoshi quit the project, which had been mostly run by him/her until then. Gavin Andreessen and the community supporting open source projects took over the leadership of the development.
The inventor’s anonymity has been central to the success and sustainability of the project.
In the following years, law enforcement authorities became involved in investigating the misuse of cryptocurrencies. If Satoshi had been identified, the creator of the alternative monetary system could have received a sentence not dissimilar to that of Ross Ulbricht, the founder of the online marketplace Silk Road.
Satoshi’s withdrawal from the project was essential for Bitcoin to remain true to its foundation as a decentralized, sustainable financial system that minimizes the trust it needs to function.
Bitcoin and inflation
Bitcoin was created to mimic the steady inflation rate of gold. Although the common definition of deflation may suggest that Bitcoin is deflationary as its purchasing power increases over time.
Deflation refers to a decrease in the money supply. This is not just a reduction in prices, though it is often defined that way. Deflation is a monetary phenomenon that causes such a fall in prices. By this logic, Bitcoin cannot be deflationary because its supply will not decrease. On the contrary, its supply will continuously increase until it reaches the 21 million coin mass. On current forecasts, this is likely to happen sometime in 2140.
When this maximum limit is reached, Bitcoin will be neither inflationary nor deflationary. Instead, it will become deflationary, as it is programmed to be. The goal is to achieve a constant monetary base and an unchanging supply.
Like gold, Bitcoin is inflationary as more of it is mined. However, given that the mining of new coins is automatically reduced by 50% every four years, the rate of inflation will eventually decrease as well.
As long as the value of the asset continues to rise relative to fiat currencies, Bitcoin’s typical annual inflation rates are usually not an issue. It is important to stress that this is not true for all cryptocurrencies.
The fixed supply of Bitcoin makes it a good hedge against inflation. When the supply of an asset is fixed and limited, it means that no new coins can enter circulation – thus eliminating the risk of inflation.
Like gold, Bitcoin does not belong to any one person, economy or currency. It is an international asset class that reflects global demand. BTC is a better option than stocks because it does not have to deal with the many economic and political risks associated with stock markets.
Like gold, Bitcoin is scarce and secure, but has an advantage over the metal because it is more portable, decentralized, and transferable.
Due to its decentralized nature, anyone can store Bitcoin. Gold, on the other hand, cannot boast this quality, as its supply is controlled by sovereign states.
Bitcoin was born after the financial crisis of 2007-2008. In response to widespread bank failures, Satoshi Nakamoto created the cryptocurrency to provide the public with an asset that did not need third parties or central authorities. The result was a cryptocurrency independent of any entity or sovereign state.
Because Bitcoin is also diversified in nature, it can serve as a recession-proof asset. While the U.S. dollar is dependent on the strengths and constraints of the U.S. economy – such as GDP, export prices, monetary policy, and currency demand – Bitcoin is not constrained by the losses or gains of any one country.
BTC’s primary purpose is to store value, which is exactly why it is expected to outperform other cryptocurrencies, such as Etherium, when a recession occurs.
How do I buy Bitcoin?
1. Choose a crypto exchange
There are numerous cryptocurrency exchanges and marketplaces that range from easy-to-use systems to complex dashboards for advanced traders.
Because Bitcoin is so popular, you will be able to purchase the token on most cryptocurrency exchanges, but it is advisable to stick to a few of the more popular exchanges such as Binance, Kraken, Coinbase, etc. Different platforms come with different fees, security measures, and may include other features, so it’s a good idea to do your research before signing up.
2. Create an account and confirm it
Start with account registration, which is completely free on the aforementioned platforms. For added security, 2FA – two-factor authentication – is also enabled. This way, you and your device are the only ones who can grant access to the account.
You are then guided through the KYC process, which is providing personal information – ID card/passport/driving license details, proof of address (e.g. bank statement or utility bill).
After completing these steps, you are ready to buy, sell and trade Bitcoin (BTC), as well as take advantage of various services such as staking.
3. Charge your account
Once your account has been registered and verified, you need to fund the account to start taking advantage of the platform’s buying and trading services.
The main deposit options are:
- Credit/Debit Card
- Bank deposit
- Peer-to-peer (P2P)
Where to buy Bitcoin?
On Binance, the world’s largest cryptocurrency exchange, deposits are absolutely free.
